In what was spun as a compromise, the health insurance lobbies (America’s Health Insurance Plans and the Blue Cross Blue Shield Association) announced in March that they would support an individual insurance mandate, as long as health care reform is not “thwarted” by the creation of a new government-run plan.¹ And why wouldn’t they support such a model, one that requires by law that everyone use their product. The real issue here is the industry’s refusal to compete on a level playing field with a government insurance plan, which is the key to making health care affordable. Otherwise, a mandate requiring everyone to buy insurance simply creates captive customers.² This fundamental disagreement between the Obama administration and the industry remains despite this week’s photo-op where the president, the insurance industry, and health care providers announced their intention to work together to reduce health care cost inflation.

The Obama administration launched an opening salvo in the insurance wars by targeting overpayments to privatized “Medicare Advantage” plans in order to free up funds for health care reform. In a nutshell, Medicare Advantage plans are private plans funded through Medicare to provide similar benefits, but at a 14% higher cost on average, according to the Medicare Payment Advisory Commission (MedPAC), an independent Congressional agency.³ Eliminating these overpayments would free up $157 billion over 10 years, a substantial down payment on health care reform.⁴ But the cost to taxpayers is only the most obvious reason to rein in these plans, which pose a real danger to Medicare.

The history of these plans—which has essentially been a struggle to keep a step ahead of insurance company schemes—illustrates the challenges we will face even if universal health care becomes a reality and private plans compete with a Medicare-like public entity.⁵

How have these plans operated thus far? The industry uses the overpayments to offer sweeteners like free dental check-ups or reduced premiums that entice seniors to enroll in the plans and justify their existence to Congress. As MedPAC Chairman Glenn Hackbarth recently testified, the enhanced benefits provided to Medicare Advantage enrollees are “overwhelmingly…not financed out of plan efficiency, but rather by the Medicare program and other beneficiaries.” ⁶ These overpayments, which come at the expense of other Medicare enrollees and the long-term health of the program, go toward profits and higher administrative costs, including the cost of marketing the plans to seniors.⁷

The basic business model is bad enough, but it is worth taking a closer look at the details. For starters, seniors can be lured into plans that leave them worse off than with Medicare,⁸ even though the private plans are routinely marketed as having the “same” coverage, plus “extras.”⁹ One study found that in almost one in four plans, out-of-pocket costs would be higher for beneficiaries in poor health.¹⁰ Take a specific example: one of the plans jointly marketed by United Health and AARP in Florida requires a $325 per day co-pay for hospital stays up to a $3,350 deductible, compared to a flat $1,068 deductible for stays of up to 60 days with regular Medicare.¹¹ This is not to say that some seniors would not be better off with the United Health-AARP plan, but with an average Medicare-covered hospital stay of 5-6 days, many would face higher costs.

The ability of insurance companies to claim that Medicare Advantage plans provide the “same” coverage as regular Medicare is an important loophole, because many seniors would be leery of switching to a for-profit provider without such assurances. Few would be willing to wade through the fine print that differentiates the myriad plans, which are not standardized like supplemental Medigap plans. In fact, Medicare Advantage plans only provide “actuarially equivalent” coverage, meaning that the projected out-of-pocket cost per enrollee should be the same as or less than with regular Medicare if the public and private plans cover similar groups of seniors.

The problem is that they may not cover similar groups of seniors. This flexibility allows the private plans to structure cost-sharing and offer benefits, such as discounted fitness club memberships, designed to appeal to healthier seniors who are less costly to cover. This longstanding problem has only been partly addressed through the gradual introduction of risk-adjusted payments,¹² which are supposed to be based on the health status of enrollees. However, since payments are not based on actual health care expenditures, the insurance companies have an incentive to exaggerate the health problems of enrollees.

As a result, insurance companies have gone from simply cherry-picking healthier seniors to “upcoding” them, that is, assigning diagnosis codes that make enrollees appear less healthy in order to inflate the payments the companies receive from Medicare.¹³ The Congressional Budget Office noted that as improved risk adjustment was being introduced, risk scores for private-plan enrollees jumped, though there was little change in the actual composition of the plans or in their enrollment.¹⁴

Not only do insurance companies mislead seniors by claiming that Medicare Advantage plans provide the “same” coverage as Medicare, they also mislead them about how they are able to provide extra benefits or reduce out-of-pocket costs. Because seniors might be put off to learn that they are benefiting at the expense of others, the plans pose as holistic healers who save both taxpayers and beneficiaries money through preventative medicine. For example, this is how United Health and AARP explain how its Florida plans are able to provide extra benefits with a $0 premium:

The government pays us a flat fee to provide you health services regardless of the actual costs of your health care. By encouraging you to get regular physical exams, your doctor can catch small problems early, when they are easier and less costly to treat. That helps keep health care costs down, making it possible for us to add extra benefits, and helps you keep active and feeling good.¹⁵

This kind of marketing was not just condoned but parroted by the Bush administration, which trumpeted that seniors would save “$100 a month, on average” with Medicare Advantage plans.¹⁶ Well into the Obama presidency, the official Medicare Web site still says Medicare Advantage plans generally have “extra benefits and lower copayments” than Medicare,¹⁷ a legacy of the Bush administration.

The Bush administration gave an enormous boost to these plans with the Medicare Modernization Act of 2003, which allowed Medicare Advantage plans to offer prescription drug benefits through Medicare Part D, but forbade the public program and the Medigap plans (that supplement the public program) from doing the same.¹⁸ The ability to offer all-in-one coverage was a lifeline to the privatized plans, which had lost market share between 2000 and 2004¹⁹ but were able to grow again as they took advantage of this new quasi-monopoly.²⁰

In other words, the private plans are only competitive because they play on a tilted playing field. When that is not enough, they resort to hard-sell tactics that take advantage of vulnerable seniors—practices that prompted an ongoing congressional investigation.²¹ They also create road blocks and traps that prevent seniors from being fully reimbur
sed for care. In a report released in December, the U.S. Government Accountability Office described tactics such as prenotification hurdles that can leave beneficiaries bearing much of the cost of their care.²²

Medicare privatizers spend a lot of taxpayer money lobbying Congress, and their story keeps changing. The original rationale for private plans was that competition would lower costs, so payments were capped at 95% of the average Medicare cost for each county.²³ The plans still prospered by cherry-picking healthy seniors, a problem that was only partly abated through risk adjusting. Since it is now established that these plans are actually less efficient than the public one, the current claim is that they help minorities and other underserved groups, an argument that also has little merit, according to research by the Center on Budget and Policy Priorities.²⁴

Some seniors do enjoy lower premiums and other perks by enrolling in Medicare Advantage plans. But as Hackbarth noted in his testimony, each dollar’s worth of enhanced benefits in private fee-for-service (PFFS) plans costs the Medicare program over three dollars.²⁵ In other words, the same benefits could be provided to three times as many seniors if this were done through the public system rather than PFFS plans, which mimic Medicare’s fee-for-service structure, providing no efficiency gains.²⁶

Privatization is hard to reverse. Reforms—such as they are—have been introduced gradually, on the pretext of not disrupting coverage for enrollees, who now comprise more than one in five seniors²⁷ and have been mobilized as a political base by the industry. But things may be changing. Not only is the Obama administration going after overpayments to Medicare Advantage plans, but AARP has named a new chief executive to replace Bill Novelli, who built up AARP’s insurance sideline and alienated many seniors with AARP’s support for the Medicare Modernization Act.²⁸ AARP now supports Obama’s push to make Medicare Advantage plans compete on a level playing field.²⁹

The history of Medicare Advantage plans shows that a public plan is a necessary but not sufficient component of real health care reform. For those tempted to think that a regulated health insurance industry without a public plan would be a workable compromise, try to imagine an industry powerful enough to block the public plan option yet not able to completely control the regulatory process now and in the future. Most scary of all: if fundamental health care reform does not pass under this administration, and attempts to rein in privatized plans are not successful, then we will find ourselves with one less viable public health plan than we had when Obama came into office, and an even more entrenched insurance industry.

Notes

1. Ignani, Karen and Scott P. Serota. 2009. Letter to Senators Max Baucus, Charles Grassley, Ted Kennedy, and Michael Enzi, March 24.

2. In Massachusetts, for example, premiums soared after the state passed a mandate in 2000, in part because of a secret deal between the state’s largest insurer and its largest hospital chain. (Sources: Bombardieri, Marcella. 2009. Patrick intensifies state’s push to curb soaring health premiums. The Boston Globe, January 6; and Allen, Scott and Marcella Bombardieri. 2008. A handshake that made healthcare history. The Boston Globe, December 28)

3. Hackbarth, Glenn M. 2009. Report to the Congress: Medicare Payment Policy. Statement before the Subcommittee on Health, Committee on Ways and Means, March 17.

4. U.S. Congressional Budget Office. 2008. Budget Options, Volume 1: Health Care, December, p. 119.

5. Alexander Hertel, “Why a Public Insurance plan is essential for health reform,” EPI Policy Memorandum, April 23, 2009).

6. Hackbarth, 2009.

7. Cosgrove, James C. 2008. Letter to Chairman Pete Stark, Subcommittee on Health, Committee on Ways and Means, U.S. House of Representatives. U.S. Government Accountability Office, December 8.

8. U.S. Government Accountability Office. 2008. Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs, February.

9. For example, a brochure provided by AARP and United Health on Medicare Advantage plans claims that they “offer the same coverage as Original Medicare Parts A and B, plus extras that contribute to your health and wellness like annual physicals, vision care, and access to a nurse advice line.” The brochure does tell seniors that “each plan has its own rules for deductibles, copayments, and other cost sharing, all different from the cost sharing in Part A and Part B. Some Medicare Advantage plans will even limit your out-of-pocket spending, a feature not offered with Original Medicare.” The use of the word “even” implies that “different” cost sharing arrangements are always a plus (AARP and Secure Horizons by United Healthcare. 2008. Medicare Advantage Explained). AARP made almost half a billion dollars in 2007 from insurance royalties, including those from Medicare Advantage plans marketed by AARP and United Health (Saul Friedman. 2009. New questions about AARP’s growing insurance business. Newsday, January 10).

10. Biles, Brian, Lauren Hersch Nicholas and Stuart Guterman. 2006. Medicare Beneficiary Out-of-Pocket Costs: Are Medicare Advantage Plans a Better Deal? The Commonwealth Fund Issue Brief, May.

11. AARP. 2009. Summary of Benefits for AARP MedicareComplete Choice Plan 2, Florida.

12. Research by the Medicare Payment Advisory Commission found that the current system of risk adjustment “overpredicts the costliness of beneficiaries who are in good health and underpredicts for those who are in poor health” (Medicare Payment Advisory Commission. 2005. Report to the Congress: Issues in a Modernized Medicare Program, Chapter 2: Medicare Advantage Payment Areas and Risk Adjustment, June.)

13. U.S. Congressional Budget Office. 2006. Designing a Premium Support System for Medicare, December.

14. Accessed on April 3, 2009 by entering a Florida zip code (32804) at the AARP MedicareComplete from SecureHorizons website: https://www.aarpmedicarecomplete.com, and then clicking on “$0.00.”

15. CMS Office of Public Affairs. 2005. Press Release: Medicare Beneficiaries to Have More Health Plan Choices and Greater Savings with Medicare Advantage Plans than Ever Before, June 30.

16. http://www.medicare.gov/choices/advantage.asp, accessed on April 3, 2009.

17. Rovner, Julie. 2003. Analysts: Medicare law to do more har
m than good. Reuters, December 5.

18. Orszag, Peter R. 2007. The Medicare Advantage Program: Trends and Options. Statement before the Subcommittee on Health, Committee on Ways and Means, U.S. House of Representatives, March 21.

19. Berenson, Robert A. 2007. Doctoring Health Care II; Yo, Democrats! Medicare is Privatizing! The American Prospect, January-February.

20. Committee on Energy and Commerce, U.S. House of Representatives. 2008. Dingell, Stupak Continue Investigation of Predatory Sales Practices of Medicare Advantage Plans (Press Release), October 13.

21. U.S. Government Accountability Office. 2008. Medicare Advantage: Characteristics, Financial Risks, and Disenrollment Rates of Beneficiaries in Private Fee-for-Service Plans, December.

22. Kaiser Family Foundation. 2008. Medicare Advantage Fact Sheet, September.

23. Angeles, January and Edwin Park. 2009. Curbing Medicare Advantage Overpayments Could Benefit Millions of Low-Income and Minority Americans, Center on Budget and Policy Priorities, February 19.

24. Hackbarth, Glenn M. 2009. Report to the Congress: Medicare Payment Policy, March 17.

25. Mark E. Miller. 2007. Private Fee-for-Service Plans in Medicare Advantage. Written testimony of MedPAC Executive Director Mark E. Miller before the Health Subcommittee of the House Ways and Means Committee, May 22.

26. Hackberth 2009.

27. Kindelan, Katie. 2009. Defining a Future at AARP; the Search for a New Novelli. Roll Call, March 9.

28. Young, Jeffrey. 2009. AARP Names New Chief Executive. The Hill, March 12.