Medicare Advantage—Big Advantage for Insurers; Little Advantage for Seniors

Medicare has ordered private insurers to stop sending letters to their Medicare Advantage customers, telling them that proposed health reform legislation could hurt them and jeopardize their benefits.  Now those who oppose reform are complaining that the government is violating insurers’ right to free speech.  I would argue that Medicare is telling insurers’ that they can’t cry “fire” in a crowded theatre—particularly when there is no fire. Medicare is quite right to describe the letters as “confusing and misleading.”  Here is an example of a letter Humana has been sending out:

“Leading health reform proposals being considered in Washington, D.C., this summer include billions in Medicare Advantage funding cuts, as well as spending reductions to original Medicare and Medicaid. While these programs need to be made more efficient, if the proposed funding cut levels become law, millions of seniors and disabled individuals could lose many of the important bbenefits and services that make Medicare Advantage health plans valuable.”

The letter is a classic example of fear-mongering. First, it is very vague: What “proposed funding cut levels”? Which “important benefits and services?”  What “spending reductions to original Medicare?  By virtue of being so vague, it will make every  letter-reader feel that he or she is about to become the victim of Draconian cuts.


What the letter doesn’t explain is that cuts to traditional Medicare are specifically designed to lift the quality of care while reducing costs by paying providers for the quality of care that they provide, rather than the volume.  Medicare also hopes to use higher fees and lower-copays to steer patients and phsyicans toward the most effective treatments for patietns who meet a particular medical profile, Medicare could save substantial sums—and protect patients form unnecessary treatments, as well as  the side effects and risks that accompany  those treatments. 

In addition, Medicare will cut fees to ineffecient hospitals.Why hospitals grouse that Medicare pays too little , the Ameircan Hopsital Assocaition acknowledges that 42% of hospitals turn a profit on Medicare payments.  Indeed, the data shows that overall, Medicare pays hospitals between 93% and 97% of what it costs them to provide care, while private insurance pays between 115% and 125% of those costs. Of course some hospitals that take care of a large number of Medicaid and uninsured patients are operating in the red—through no fault of their own . (On average, Medicaid’s reimbursements are 30% lower than Medicare’s, for the same service.)

But many hospitals are simply inefficient. And by paying them more, private insurers are rewarding them for the inefficiency. Humana acknowledges this when it says “while these programs need to be made more efficient . . .”

But Humana’s real concern is about cuts to Medicare Advantage (MA) and  the danger that patients will lose those unspecified “important benefits and services.”

The Baucus proposal would slice payments to Medicare Advantage plans by $123 billion over 10 years. Under a companion bill approved by three House committees, the cuts would total $156 billion. President Obama has proposed cuts totaling $175 billion. 

Why do so many legislators want to whack MA?  President Obama sums up their reasoning in a nutshell: “Insurers” the president declared, “are getting ‘unwarranted subsidies’ that ‘pad their profits but don’t improve the care of seniors.’”

When Congress passed the Medicare Modernization Act which created Medicare Advantage it agreed to pay for-profit insurers far more per beneficiary than regular Medicare would spend to cover the same people. (In 2009, it paid these insurers an average of 14 percent above what it would cost Medicare to provide comprehensive benefits. )

The theory was that in return, private insurers would offer seniors more benefits than old-fashioned, government-sponsored Medicare while charging them less.

It hasn’t quite worked out that way. Granted, at the beginning many MA plans often offer sweeteners like vision and dental benefits, disease management programs, gym memberships and even transportation assistance.  But, as Congressional Budget Office (CBO) Director Peter R. Orszag  pointed out  in testimony before the Senate Finance Committee in the spring of 2007, “little information is available on the degree to which the plans generate better health outcomes than  traditional Medicare. In other words, does the disease management work? We don’t know—and that, after all, should be the point of any additional spending

Meanwhile, it seems that the “extra services” for seniors have been shrinking. In a report issued in February of last year, the Government Accounting Office (GAO ) noted that only 11 percent of the money that the government will be shelling out for Medicare Advantage over the next four years will go to extra benefits.  Most of the rest will go to reducing out-of-pocket spending and co-pays, which sounds good—until you realize that this reduction will come at the expense of higher premiums for the 35.3 million Medicare beneficiaries now enrolled in traditional Medicare.

Thus ultimately, as Martha Gold, a Senior Fellow at Mathematic Policy Research, noted in a 2007 Health Affairs article while "individual enrollees may gain, beneficiaries as a whole may be harmed if higher payments add to the fiscal stress on Medicare  making the program less viable in the long run."

Maybe someone should be writing a letter to the 75% of all Medicare beneficiaries who haven’t signed up for Medicare Advantage, warning them that they are footing the bill for a program that is over-paying insurers? They deserve a “head’s up” that if Medicare continues the windfall payments to Advantage insurers, traditional Medicare risks running out of money.

Meanwhile, the medical “advantage” of MA for seniors remains dubious—at best. When the Medicare Payment Advisory Commission ( MedPAC), the independent agency that advises Congress on Medicare spending, took a close look at the quality of care that seniors are receiving under Medicare Advantage two years ago, MedPAC Commissioner Jack C. Ebeler called the data on quality "disappointing." Then MedPac chairman Glenn Hackbarth weighed in: "I'm struggling to get to 'disappointed,'" he said dryly, referring to Ebeler's comment. "I'm more depressed.”

As for the notion that seniors who have Medicare Advantage save money by paying less out-of-pocket,  this might  be true for the average, healthy beneficiary, but if you look closely, you will find that many plans cut back on benefits that sicker seniors desperately need. For example,  the GAO report notes that “19 percent of  Medicare Advantage beneficiaries [are] in plans that projected higher cost-sharing for home health services, and 16 percent of beneficiaries [are] in plans that projected higher cost-sharing for inpatient services," meaning that a decent chunk of MA enrollees are actually going to see higher out-of-pocket costs and co-pays than they would under traditional Medicare.” 

Maybe some MA beneficiaries are spending somewhat less –but the modest benefit is not worth the steep 14% premium that we paying these insurers. If Medicare saved that money, it might be able to reduce co-pays for all beneficiaries—or, at the very least, keep a cap on them.

The drug plan also hasn’t worked out as many hoped. By 2008, 86 percent of private sector Medicare drug plans were charging enormous co-pays for what they called “tier-4” drugs –extremely expensive medications use to treat diseases such as like multiple sclerosis, hepatitis C and some cancers. Usually insurers require a flat co-pay of $10, $25 or $35 for drugs—depending on the product is listed as tier 1, tier 2 or tier 3. But when Medicare insurers invented tier 4 drugs, they made co-pays a percentage of the drug’s price. . Since some of these drugs can cost $100,000 or more a year, a 33 percent co-pay can add up to $33,300.

By shifting costs to patients who are dying or in pain, insurers are violating the most basic principle of “insurance.” The point of insurance is to protect individuals against financial catastrophe by letting them buy into a pool that spreads the risk of getting sick. It is bad enough to have MS; the victim should not also face financial ruin—especially if he thought he had insurance.

And if a senior becomes seriously ill, he may well discover that while he had been told that there was a $4,000 annual cap on out-
of- pocket payments, certain very pricey items are excluded from the cap
. Last year, the New York Times revealed that 29 percent of MA plans that have caps don’t include the cost of some cancer drugs, 23 percent exclude the cost of some mental health services and 21 percent don’t include home health care expenses. These, of course, are the big ticket items that could bankrupt a senior—or force her to sell her home.

In other words, the claim that MA is cheaper for Medicare beneficiaries has a big fat asterisk next to it.

But nearly one-quarter of seniors eligible for Medicare have signed up. Doesn’t that suggest that the program is popular? Last year, the New York Times exposed the abusive and predatory marketing practices that insurers have been using to sell Medicare advantageoften to seniors who aren’t able to read the fine print.   Insurers are particularly eager to sell their “fee-for-service” Advantage plans, the Times explained because “Medicare pays them an average of 17 percent above what it would cost Medicare itself to deliver these plans.” All told, the unjustified subsidies will cost the government more than $50 billion from 2009 to 2012” the Times editorial observed.

“Small wonder that plans use high-pressure tactics to market these lucrative policies,” the Times added. “In the worst cases, sales agents have masqueraded as Medicare officials, forged the signatures of elderly clients, switched people from traditional Medicare into private plans that don’t include their doctors and barged into homes to pressure semiliterate people into signing.

The enormous subsidies that we are paying MA insurers “help private plans woo beneficiaries away from the traditional program,” the Times noted. “And they create a big incentive for insurers to maximize sales through aggressive, sometimes unscrupulous, marketing”

Last year the Bush administration did impose new regulations on the insurers, but the Times pointed out  those rules  still fall short of what is needed because the states don’t have the power to enforce them.

How many of the millions of Medicare beneficiaries on Advantage are happy that they signed up?  No one knows for sure, though in a follow-up story, the Times reported that an audit found that “tens of thousands of Medicare recipients have been victims of deceptive sales tactics and had claims improperly denied by private insurers. “ Inappropriate activity included “the improper termination of coverage for people with H.I.V. and AIDS, huge backlogs of claims and complaints, and a failure to answer telephone calls from consumers, doctors and drugstores.”

If seniors aren’t happy with their MA plan, why don’t they switch? Anyone who is tried to help someone choose a MA plan knows how complicated they are.. Lots of fine print. Few seniors want to repeat the experience.

8 thoughts on “Medicare Advantage—Big Advantage for Insurers; Little Advantage for Seniors

  1. Great companion post for your piece. I actually flagged it when i read it:
    http://theincidentaleconomist.com/obama-half-truth/
    On the Tier 4 problem, shifty contract language yes, but that is a big pic problem that needs to go beyond MA plans. On one hand Maggie, yes, high copays, but on the other, as you have pointed out, many of these drugs have QALYs off the charts. In some ways, value based purchasing in a crude, blunt format. Totally unacceptable in its current form, but in some ways, the MCOs have a real problem with this class of drugs. Need federal leadership here.

  2. The Ohio Public Employees Retirement system is requiring that all Medicare eligible retirees sign up for Humana Medicare Advantage next year. I am really distressed about this, but what can I do?

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  4. I’m a Medicare Advantage product manager in Oregon where 45% of beneficiaries sign up for MA plans (highest in the country) because we offer good plans and the competitive market keeps us honest. So I don’t work in Miami or any of the wild west of MA plans.
    With regards to Humana, the letter that they sent was not submitted to CMS for review as required so they broke a very basic rule. I think this sufficiently shows their intent.
    What I would say that Humana was trying to do was point out that that with MA revenue cuts, the lack of revenue has to come from either margin, provider reimbursement, or the member benefits. The health plans in general don’t have enough margin to absorb the cuts and providers are unlikely to renegotiate. Congress and CMS have only started to articulate that by basic math, seniors will get a lesser benefit.
    As for why Medicare Advantage is still a good program:
    1. As of a 2006 Oregon physician survey, 35% of primary care providers don’t accept Medicare and that number is growing. One of the reasons that Medicare Advantage costs more is that they pay providers enough to see members. I would venture that the average non-PFFS provider payment is 115% of Medicare so that’s a decent portion of the additional 12%-14%. Provider reimbursement with Medicare and MA is a key issue that I don’t see sufficiently discussed.
    2. I’ll throw the PFFS service plans under the bus for most of the low benefits and lack of value with care coordination (since they have no network). When they sunset in 2011, Medicare Advantage should look very different. To be fair for the PFFS plans, they offer mostly $0 plans in rural areas where there are no other options and that’s the right price. Since PFFS plans can continue in areas with less than 2 network MA plans, they will still be an option.
    3. With Tier 4, that’s a general insurance problem. However, CMS could easily solve it by setting a benefit requirement like they do with other services. I kind of wonder why they don’t as Brad F articulates.
    4. Cost shift. The margins that plans made on MA were used for savings in commercially insured plans. The cuts in MA will likely impact commercially insured
    In summary, there is a valuable framework of MA to provide care coordination (as Dartmouth Atlas folks have pointed out). Insurance plans definitely got drunk on the MA revenue party which was not going to last forever. However, let’s not tar all MA plan with the same feathers.

  5. Don–
    I believe you that MA plans in Oregon are different.
    But when it comes to Healthcare, Oregon is part of what some Cananda South –the Northwest and Northern New England — NH, VT and Maine.
    It’s just not representative of most of hte country. Lots of Bait and Swith with MA in New York.
    And in general Medicare payments to most specialists are fair — though payments for primary care, pediatrics,
    palliative care, general surgery are too low, as
    teh House bill recognizes.
    But some specialists are overpaid for certain procedures –and in those cases we see a lot of over-treatment–as MedPAC has pointed out.
    As you no doubt know, specialists fees under Medicare are updated periodically by a committee that is made up primarily of specialists. They meet behind closed doors. The majority of the people on the commitee are there for life.
    They fly under the radar and have great power. Medicare usually accepts all of their recommendations.
    As MedPAC points out, they virtually NEVER suggest lowering specailists’ fees even when new technology has made the service easier–or when questions have been raised about hte procedure or test.
    Finally, it’s the folks on traditional Medicare who are taking the hit as their premiums and co-pays go up to fund this windfall for the insurance industry.
    There is really no reason for Medicare to go through a thrid party to deliver services.
    By and large for-profit insurers have not been innovative in delivering better services. (Though sone non-profits have)
    And going thorugh a middle-man only adds another level of costs.
    The Bush administration goal was to privatize both Medicare and Social Secruity (thank God they didn’t hand SS over the Wall Street.)
    IF Medicare is going to survive financially it has to once again become a public program, with the reforms outlined in the House bill and in MedPac’s
    reforms.
    If non-profit insurers wanted to come forward and bid for Medicare contrascts, asking for no more than what it costs Medicare to deliver the source, that might provide good competitoin for Medicare–But Medicare cannot afford to be in the business of providing profits for shareholders.

  6. Brad F & Lois–
    Brad– thanks very much for the link to this excellent article.
    It’s so good to see someone truly knowledgable about the Advantage numbers
    offer information that counters the fear-mongering in much of the mainstream press.
    I’ve turned your link into a post
    Lois—
    I would get in touch with the American Federation of State, County and Municipal Employees (AFSCME.
    See this post about how many public employees are very, very unhappy about being shoved into Medicare
    Advantage and AFSCME’s response:
    http://www.healthbeatblog.org/2008/07/the-trouble-wit.html

  7. Maggie,
    I think that we mostly agree and I especially agree with you on the specialists role in pricing. My main point is that just like there are parts of the country where providers are doing it right, there are insurance companies who are doing it right, too. Usually in the same parts of the country.
    In the push for change, a tricky aspect is to reward, not punish carriers and providers who are doing a good job with providing care.

  8. Don:
    You write: “just like there are parts of the country where providers are doing it right, there are insurance companies who are doing it right, too. Usually in the same parts of the country.
    “In the push for change, a tricky aspect is to reward, not punish carriers and providers who are doing a good job with providing care.”
    I totally agree.
    And, as I have said in the past, I think that many of the best private insurers are non-profits. And I definitely want to see them remain part of the system.
    The for-profit, on the other hand, don’t have a great track record when it comes to being patient-centered.
    NO doubt there are some good for-profit insurers out there-and perhaps the big companies operate differently in different parts of the country, but I have to say that, by and large, they have put profits ahead of patients.
    As for specialists, certaintly there a great many excellent specialists out there who make every effort to avoid over-treatment. And the less
    wasteful, more conservative approach to medicine does tend to be concentrated in certain parts of the country.

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