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HEALTH PLANS: SCHIP and Medicare Advantage

You’ll be seeing more and more of Maggie Mahar here as she works blogging into her new role at The Century Foundation. But of course, she’s not the only one who’s made this connection. If you want to see more of your host’s caustic comments on Medicare Advantange, and lots of good comments around it, try here, here here, here or here. Here’s Maggie on this week’s dust up.

A debate rages in Congress: Who needs the money more  – UnitedHealth or the kids?

This week, a storm hit the House of Representatives when law-makers began  to debate a proposal that would, in the words of a Wall Street Journal editorial, “steal nearly $50 billion from Medicare Advantage, the innovative attempt to bring private competition to senior health care” in order to beef up the State Children’s Health Insurance Program (SCHIP), a program that delivers health care to poor children.

Last night, the House voted 225-204 to pass the legislation.

SCHIP is scheduled to expire September 30; the House bill would renew the program while expanding it to include another 5.1 million children at a cost of an extra $50 billion over five years. The bill’s backers propose to fund the legislation by increasing the federal cigarette tax by 45 cents while   simultaneously paring the premium that Medicare pays private insurers who provide Medicare to seniors. The goal of the bill, reformers say, is to ensure that all children in the United States have health insurance. The Wall Street Journal’s editors see things otherwise: “Democrats apparently want to starve any private option for Medicare,” the editorial concluded.

Rupert Murdoch hasn’t yet weighed in, so I decided to take a look at the proposal. Would the House bill really make it impossible for private sector insurers to continue to offer needed benefits to seniors?

I began by looking at insurers’ finances only to discover that the health care insurance industry is, in fact, facing rough weather ahead. While the cost of providing health care continues to climb, more and more employers are backing away from providing health care benefits for their employees. Others are raising premiums and co-pays to a point that some workers can’t afford to participate in the plans. This means that insurers are losing customers.

As a result, one might expect that insurers’ profits would be falling. One would be wrong.

Just last week, Bloomberg reported that in the second quarter of 2007 profits at UnitedHealth Group, the largest health insurer in the United States, climbed by 22 percent. On the heels of that happy announcement came the news that Humana’s earnings more than doubled.

They are not alone. Aetna posted a 16 percent jump in earnings. While WellPoint, the second-largest U.S. health insurer, saw profits rise 11 percent over the same span.

This is not to say that Wall Street broke out the champagne. In recent years, investors have come to count on rich returns from insurers, and many sniff at numbers like 11 percent. To give you an idea of what investors expect, consider the fact that Humana’s stock has climbed 26 percent in the past seven months. Over five years, UnitedHealth Group’s shares have gained 125 percent, while WellPoint’s investors have reaped a 130 percent return. Granted, some insurers have had a tougher time, but still, as of the end of July, the six-member managed care index showed a 13 percent gain in just seven months.

Meanwhile, just as one would expect, many insurers have been losing business in the employer-based market: Humana, for example, saw the number of customers in employer-sponsored health plans fall by 10.7 percent in the second quarter.  while UnitedHealth reports that, in the year ending June 30, it lost 10,000 customers in employer programs. WellPoint explains that its health-plan membership declined by 108,000 from the first quarter, in part because of declines in employment in the automobile, home-building, and mortgage industries.

Health care inflation also is taking its toll. In April, Aetna’s stock dropped sharply after the company confessed that its spending on patient care has climbed from 77.9 percent of its revenues to 79.4 percent.

In the midst of so much bad news, how have insurers continued to maintain double-digit earnings growth? Bloomberg explains: “UnitedHealth’s profits rose 22 percent on gains from government-sponsored medical programs.” Here Bloomberg is referring to what it describes as “the boon UnitedHealth has seen from increasing the profitability of its Medicare programs for the elderly and adding 290,000 members in state Medicaid programs for the poor in the 12 months through June 30.”

Aetna also got a boost from the government; in the second quarter, it raked in Medicare premiums of $677.8 million, up from $436 million a year earlier.

WellPoint President Angela Braly echoes the theme, announcing that her company’s profits were driven by “expanded enrollment in government-funded programs” as well as “tighter control of costs.”

As for Humana, it “reported its strongest quarterly result in recent memory on the back of stronger-than-expected performance in the government segment,” according to Gregory Nersessian, a Credit Suisse analyst in New York.

In fact, “Humana derives more than 50 percent of its 2007 earnings from Medicare Advantage alone,” Justin Lake, an analyst with UBS Investment Research, recently pointed out to his clients. The company is forecasting Medicare profits margins of 5 percent for 2007—up from 4 to 5 percent in earlier statements.

Just how is it that Medicare Advantage has turned out to be such a lucrative business? It may have something to do with the fact that Medicare is paying insurers an average of 12 percent more (or about $1,000 more, per beneficiary) than Medicare would spend if it covered those same seniors directly.

This seems counterintuitive. After all, isn’t the private sector supposed to be more efficient than the government? Shouldn’t competition among for-profit insurers mean that they would be able to provide Medicare for less?

When Congress passed the Medicare Modernization Act of 2003, it decided to sweeten the deal for the insurance industry because the program’s backers wanted to make sure that a large number of Medicare patients would switch to private plans. After all, the majority of seniors were quite satisfied with regular Medicare. They would need encouragement to leave a program they knew—particularly since so many had been badly burned by private insurers in the late 1990s when Medicare began giving seniors a choice between standard Medicare (with the government paying medical bills directly) and Medicare+Choice (a program that paid HMOs to provide Medicare benefits to seniors).

The architects of Medicare+Choice hoped that managed care plans might find creative ways to cut Medicare’s costs while enhancing benefits. Indeed, American Association of Health Plans’ president Karen Ignagni told Congress that insurers could do a splendid job if they were just paid the same amount that Medicare was spending on seniors. All Ignagni wanted was “a level playing field.” (Testimony before the Senate Finance Committee May 27, 1999.)

Mindful of that experience, legislators who pushed Medicare Advantage through Congress in 2003 decided to pay insurers more so that they could offer more benefits (including prescription drugs, sometimes at no extra charge), enroll more patients—and make more profits. The government has “pretty much given up on the argument that the HMOs save money,” Lori Achman, a research analyst at Mathematica Policy Research, an independent research center, told the New York Times.

How much more is Medicare paying insurers? According to the Congressional Budget Office, over the next five years, Medicare will be paying for-profit companies $54 billion above and beyond what it would cost traditional Medicare to serve the same beneficiaries. Over ten years, the bonus will total $149 billion

A portion of that premium does go to seniors in the form of extra benefits and lower cost-sharing. But the remainder of what critics call the “overpayment” covers the insurer’s administrative costs, marketing—and profits.

The amount that goes into profits varies by plan and by region, but overall, if the Wall Street reports and earnings announcements quoted above are to be believed, the government’s largesse is making a big difference in helping to offset insurers’ losses in other areas. Or as one analyst put it, insurers are achieving double-digit profits “on the back of” stronger-than-expected performance in their Medicare business.

To put it bluntly, at a time when some customers are deserting private insurers (because they find premiums too high), the government is subsidizing the industry. But is this Medicare’s job? Are we to view UnitedHealth as another Chrysler? Are the taxpayers who fund Medicare responsible for making sure that UnitedHealth’s shareholders continue to make 125 percent on their investment every five years?

The idea of subsidizing for-profit insurers does not sit well with many members of Congress. Indeed, even UBS analyst Justin Lake thinks this is a bit much: “It is likely inevitable Congress will be forced to act [to cut the ‘overpayment’], given the competing priorities and long-term solvency issues facing Medicare,” Lake wrote in a July 23 note to clients.

And now House Democrats are threatening to do just that. Under the SCHIP legislation that the House voted for last night, lawmakers would equalize payments between Medicare Advantage plans and traditional Medicare over five years, reducing federal reimbursements by nearly $50 billion in order to help fund health insurance for children.

House Republicans claim that Democrats are trying to rob seniors, and  tried to enlist support from the AARP. But AARP policy director John Rother refused, saying that funding for Medicare physician reimbursements and free medical screenings included in the SCHIP bill more than makes up for any difficulties managed-care companies might face when they get the same reimbursement rates as the
core Medicare “>.

It will be interesting to see how the Senate—and President Bush—respond to this proposal as they consider the bottom-line issue: who needs the $50 billion more, children who are either uninsured or under-insured—or an industry that is already racking up double-digit profits.

To read the longer version of this story—and find out what other options Congress might have– see www.tcf.org.  Please return here to comment.

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Best Bail Bonds Denverjay wisneskiJeff SaleebyLarry HaflingNick Reid Recent comment authors
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Best Bail Bonds Denver
Guest

I am not positive the place you are getting your information, but great topic. I must spend some time learning much more or working out more. Thank you for magnificent information I was on the lookout for this information for my mission.

Jay Wisneski
Guest

“The truth is that they have, in fact, ticked off customers, doctors and hospitals. Do you know a single person who has been seriously ill and still likes his insurance company? (If you look at polls, health insurance companies are about as popular as oil companies.) As for doctors and hospitals, the vast majority hate insurers. They tend to prefer Medicare because it: pays promptly and doesn’t try to micro-manage the practice of medicien by requiring doctors to spend hours on the phone . . . )” WHAT A BULLSHIT LIE! Doctors & Most Specilaists in Washington, California, Oregon Connecticut… Read more »

jay wisneski
Guest

the uninformed morons who want to take away medicare advantage don’t realize that people on disability who are not 65 aren’t even ELIGIBLE for a med supplement plan. Supplements also hike up premiums as your health worsens. Advantage plans do not underwrite based on health conditions & there also Advantage plans specifially DESIGNED FOR PEOPLE WITH CHRONIC OR DISABLING CONDITIONS! WHAT SUPPLEMENT DOES THAT?….(crickets) At least ALL Medicare beneficiaries(with only some exceptions of ESRD) can enroll in a Med Advantage plan, regardless of age. Also, the idiots also don’t consider the fact that not all providers accept Medicare. IN CA,… Read more »

Jeff Saleeby
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Jeff Saleeby

I really get tired of the current administration suffering under the illusion that it has business sense. The cliches about gaining efficicancy through privitatizing Medicare programs is as bogus as George Bush’s hyped business career. The shifting of bill paying responsibility from Medicare parts A and B which operates on 3 to 4% overhead to Avdantage plans which is costing Medicare from 12 to 19% more than traditional parts A and B. Do Republicians really want to destroy the most efficiant medical insurance system in the world? I write this not as a liberal idealist but as one who makes… Read more »

Larry Hafling
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Larry Hafling

In all of this rush to change things that they set up I wonder if those in D.C. will do anything for those people who must go on Medicare because of a disability but, because they are not 65, can not find a Medi Gap plan to enroll in!!! For those people Medicare Advantage gives a little help.
Secondly, if those who legislated were saddled with their decisions for there healthcare I wonder if they might do things differently. It is easy to legislate on something that will not touch you!!

Nick Reid
Guest
Nick Reid

While it is true that AARP is staying out of this debate, they are doing it only for the time being. AARP has a very lucrative partenrship with United Health Care and will eventually join the fray, if needed. Because cutting Medicare Advantage would effect mainly the poor, though, the NAACP has joined the fight against any cuts in the program. Anyone who thinks that these plans are just so big companies can get richer and that they don’t benefit medicare recipients has never spoken to people who have these plans. In many areas, MA plans are providing medicare recipients… Read more »

Barry Carol
Guest
Barry Carol

Maggie, I understand your conflict of interest argument with respect to private (for profit) insurers, especially those that are publicly held. Presumably, non-profits are not under the same pressure, though they charge comparable rates for their policies and, in the case of the non-profit Blues that enjoy very high market shares in their respective states, their provider reimbursement rates are generally somewhat lower than their private sector competitors due to superior market clout. One disadvantage I think Medicare has is inflexibility. It either covers a service or it doesn’t. It tends to pay all providers in a given geography the… Read more »

Matthew Holt
Guest

Booya! Maggie doesn’t think that I’m a mad money type trader! Well I am when I feel like going short…and usually UNH makes me pay for that!
OTherwise this is a very intelligent discussion…and no Sonoma, no censorship. Only I have that power and I never use it (other than spam) and wasnt around this weekend to do so anyway

Maggie Mahar
Guest
Maggie Mahar

EDIT OF COMMENT ABOVE:
The second paragraph should begin: “Why can’t for-profit insurers do this as well or better than MEDICARE?

Maggie Mahar
Guest
Maggie Mahar

Barry– I agree that Medicare needs to be reformed. But if you read the MedPac reports you see that they know it too. Medicare is running out of money–either you slash payments to all physicians by a huge amount (a political non-starter) or you start looking at cost-effectiveness, over-treatment, fee-for-service, overpayments to certain specialities,regional differences,etc. Why can’t private insuers do this as well or better than for-profit insurers? It’s not just that for-profits have to spend money on marketing and advertising, or that individual for-profits don’t have as much clout when it comes to negotiating prices with drugmakers and hospitals,… Read more »

Maggie Mahar
Guest
Maggie Mahar

Barry– I agree that Medicare needs to be reformed. But if you read the MedPac reports you see that they know it too. Medicare is running out of money–either you slash payments to all physicians by a huge amount (a political non-starter) or you start looking at cost-effectiveness, over-treatment, fee-for-service, overpayments to certain specialities,regional differences,etc. Why can’t private insuers do this as well or better than for-profit insurers? It’s not just that for-profits have to spend money on marketing and advertising, or that individual for-profits don’t have as much clout when it comes to negotiating prices with drugmakers and hospitals,… Read more »

Barry Carol
Guest
Barry Carol

Just to clarify, in my voucher related comments above, perhaps Medicare could be not just one of the choices but the default choice for those unwilling or unable to choose among the health insurance options available to them. Alternatively, if there are several solid plans than received regulatory approval and meet at least minimum coverage standards defined by law, people who didn’t want to choose could be randomly assigned to a plan.

Barry Carol
Guest
Barry Carol

Bev, Your point is well taken. Let me speak to what goes on in the money management world with respect to employer sponsored 401-K plans. Many people know nothing about money management, are totally confused about what choices to make, and, the more choices available to them, the more confused they are. So, what to do. There are basically two approaches for those unable or unwilling to make their own asset allocation choices. One is an industry developed product called lifestyle funds. For example, if your projected retirement date is 2020, you can choose the 2020 fund. If it’s 2030,… Read more »

bev M.D.
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bev M.D.

Barry; Remember, I’m the one who wants YOU to be on the committee to reform health care. (: However, I do have to qualify your statement that “most people” could function very well finding a doctor and reasonable health care on their own, given enough information. I have no doubt that you could do that, and that most of the people commenting on this blog could do that. However, that certainly does NOT hold for much of the population that physicians see in their offices, or who come to ER’s, even if they are insured. Think of people’s inability to… Read more »

Barry Carol
Guest
Barry Carol

Maggie, I have no problem with government setting minimum standards for what health insurance must cover. Hopefully, as you say, it would rely heavily on input from doctors and other experts as opposed to bureaucrats but also be sensitive to costs. It should have a reasonable out of pocket maximum, which Medicare, by the way, does not have. Federal employees get a choice of numerous plans, and even though plenty of those employees have limited education and sophistication, they seem to be able to make a reasonable health insurance choice that suits their needs. I think most people could navigate… Read more »