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Democrats Target Federal Subsidies for Medicare’s Private Plans

MIAMI – Besides giant retirement communities and early bird specials, seniors here have embraced something else: privately run Medicare health plans that are an alternative to the traditional government-run program.

In South Florida, 40 percent of seniors have enrolled in these federally subsidized Medicare Advantage plans-among the highest percentage in the country. It’s easy to see why: They can choose from plans that have no monthly premiums, deductibles or co-pays to see their doctors and would alleviate the need for Medicare supplemental insurance. Many of the plans offer a wide array of additional benefits, including free generic drugs and gym memberships.

Those benefits go well beyond ones offered by traditional Medicare, or even by Medicare Advantage plans in other parts of the country, in part because of the way the government calculates the payments.

But, as the battle over health care reform intensifies, Medicare private plans, which cover more than one in five seniors nationwide , are caught in the crosshairs. On one level, the debate is simply about money: President Barack Obama and House Democrats want to cut $177 billion in federal payments to the private plans over the next decade to help finance coverage for the uninsured. On another level, the fight over private Medicare plans — which has been a partisan flashpoint for years — involves difficult questions on the issues of fairness, efficiency and choice.

Currently, the federal government pays Medicare Advantage plans, on average, 14 percent more per patient than it pays the traditional fee-for-service program. Those plans include some of the nation’s largest insurers, such as UnitedHealthcare and Humana Inc. and many Blue Cross and Blue Shield affiliates.

StateHealthFacts.org: Percentage of Medicare Advantage Plan Enrollees


Democrats Target Federal Subsidies for Medicare's Private Plans

Obama and other critics argue that paying more to the Medicare Advantage plans is unfair to seniors in the traditional program and say the funding cuts will not affect seniors’ benefits.

But the president’s proposed cuts worry Roselee Taylor, 75, who lives in Palm Beach Gardens and is enrolled in a Medicare Advantage plan sold by Humana Inc. “I don’t think the Obama idea is a good one,” she said. “It will hurt me.”

She pays no monthly premium, nothing to see her primary care doctor and just $15 to visit a specialist. In addition to hospital and prescription drug coverage, she gets free eyeglasses, dentist visits and a fitness center membership.

Now she is worried she might lose some of her generous benefits if the government lowers payments to the private plans.

“I had my bypass surgery and they paid for everything, and I wasn’t out a dime,” she said last month while quilting at a senior center.

However, Erika Brigham, 71, of Miami Beach is concerned about the issue of traditional Medicare subsidizing Medicare Advantage plans.

Brigham, who works as a volunteer for Organizing for America, the Democratic National Committee’s community organizing project that has been trying to drive support for Obama’s health overhaul, said she joined a Humana plan last year after being enticed with the free fitness center membership and classes on how to eat better. She plans to go back to traditional Medicare in January because she doesn’t think it’s right for private health plans to get paid billions of dollars a year above what’s needed to care for seniors.

“The insurers are bleeding the Medicare system,” said Brigham. “I have a philosophical problem with that.”

Seniors Concerned About Changes

Obama’s effort to cut the $177 billion from the private programs is part of a plan to trim the entire Medicare program by $500 billion over 10 years to help finance the health care overhaul.

The cost cutting has raised concerns among seniors. According to an August poll by the Kaiser Family Foundation, about 37 percent of seniors expect Medicare to be worse off if health reform legislation passes this year, compared to 20 percent who think it will be better off. Only 23 percent of seniors said they will be better off with health reform, compared to 39 percent of those under 65 who said the same thing. (KHN is part of the foundation.)

The health insurance industry says the Medicare Advantage funding cut would prompt carriers to curtail benefits or to move out of unprofitable markets. It also points out that the extra funding helps plans hold down out-of-pocket costs for seniors and provide extra benefits that seniors might otherwise not be able to afford.

Robert Berenson, a senior fellow at the Urban Institute and a Medicare official during the Clinton administration, said Medicare Advantage patients would be affected by the cuts.

“They will feel pain,” he said of Medicare Advantage members. “We need to reduce the overpayments, but to say no one will experience any pain is exaggerating.”

Those who are concerned about a pullback by insurers look to 1997 when lawmakers struggled to cut more than $115 billion from Medicare as part of the Balanced Budget Act and Congress capped raises for Medicare health plans to 2 percent in most areas. At the time, health inflation was at 6 percent. The major insurers responded by pulling out of dozens of counties around the country and forcing more than 250,000 seniors to change health plans or go back to traditional Medicare. Remaining plans increased costs and curbed benefits.

The Bush administration, seeking to increase the private sector’s role in Medicare, reversed the 1997 cuts as part of the 2003 Medicare Modernization Act that created a Medicare drug benefit. The law provided an increase of $46 billion for the industry over 10 years.

That measure, for the first time, also authorized paying the Medicare HMOs more than the average per capita costs in traditional Medicare. Today, the 14 percent in extra payments amounts to about an extra $12 billion a year.

But the actual fees vary by county to take into account differences in health spending across the nation. As a result, health plans operating in counties with high per capita Medicare spending such as Miami-Dade today get paid nearly double the monthly per capita fee of health plans in North Florida or Minnesota, where Medicare spending is relatively low. In Miami-Dade County, health plans receive $1,230 per members per month, about $400 more than the national average.

Rapid Growth for Medicare Advantage

Membership in Medicare Advantage doubled in the past five years to 10.3 million, or 22 percent of seniors across the country. The increased funding has also helped the plans’ bottom line. Medicare Advantage plans made a $3.3 billion profit in 2006, according to a report by the General Accountability Office last year.

The House version of a health overhaul bill would eliminate that 14 percent subsidy over three years. The Senate Finance Committee, which is also working on a reform plan, last spring proposed reducing the costs of the program by having the plans bid to get government approval to offer coverage in the area. Under this scenario, the disparity in the government reimbursement would likely be reduced because payment would no longer be directly tied to the traditional Medicare fee for service system.

Neither cost cutting plan sits well with insurers.

“When the rates get cut, it translates into higher premiums and lower benefits,” said Alissa Fox, senior vice president for the Blue Cross and Blue Shield Association. “We are concerned about the impact on beneficiaries.”

Supporters of the funding cuts note that studies by the Congressional Budget Office and the Medicare Payment Advisory Commission, an independent agency that advises Congress, indicate seniors in the plans are no healthier than those in traditional Medicare. And seniors’ satisfaction is similar in Medicare Advantage to traditional Medicare, according to Medicare Payment Advisory Commission.

Even without health overhaul legislation, Medicare health plans are expected to cut benefits for 2010 in response to the Medicare program lowering reimbursement by 4 percent. The health plans likely will disclose their benefits for next year in early October.

AARP, which typically opposes any legislation that it expects to take away benefits from seniors, supports the proposal to cut Medicare Advantage funding. David Certner, AARP’s legislative policy director, said the organization does not expect major retrenchment by the plans and agrees with the Obama administration’s contention that people on traditional Medicare should not be subsidizing those in Medicare Advantage. This issue is important, he said, because the entire Medicare program is expected to go into the red in 2017.

Still, most seniors don’t even understand the overall financial difficulties with the program and are focusing on the current controversy, he added. “Seniors are very nervous right now,” Certner said. “They don’t know what to believe.”

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Medicare