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Private Medicare plans face uphill battle to prove efficiency

I have been struck by the optimism regarding private Medicare presented by health plan executives during the recent earnings season and the analysts failure to press them on just how their numbers will add-up to sustain the long-term viability of a private Medicare strategy.

The typical private Medicare health plan operates on a medical cost ratio in the mid-80s. Let’s assume 86% for medical costs and the remaining 14% for overhead, profit, and taxes.

Government-run Medicare operates on about 3% overhead. One can argue that many federal Medicare costs are paid for elsewhere but that is the number the private plans have to compete against. So private Medicare plans spend 14% on overhead and Medicare charges
itself 3% — that’s an 11% disadvantage for the private market right
out of the box.

Private plans have to offer better benefits in order for seniors to want to buy the private plans. Let’s use 6% as the amount health plans spend for the extra benefits needed to attract seniors to their plans.

So, in this example, the disadvantage for private Medicare is not only the 11% overhead shortfall but another 6% for the benefits needed to keep selling the plans to seniors–or a total burden of about 17%.

Today, the government pays private Medicare plans an average of 13% more than it does the government-run plan–17% more for the private fee-for-service (PFFS) version that will sunset in 2011.

These extra payments are what make private Medicare so attractive to seniors and HMOs today.

Let’s say our HMO has half of its private Medicare growth in PFFS. Their average payment above what standard Medicare gets would be about 15%. So this hypothetical HMO gets 115% of what Medicare pays itself for the same senior population. Take the 11% overhead disadvantage from that as well as the extra 6% they spend on attracting seniors with better benefits and the HMO would have a medical care cost of 98% of what Medicare spends (115%-11%-6%=98%) in order to balance the books today.

So, today my hypothetical HMO is managing its medical costs at about 98% of what Medicare spends for the same senior population.

But what happens if the extra Medicare payments to private Medicare go away? It is almost certain that is going to happen–presuming the Democrats increase their majorities in the fall.

Private Medicare will always need to offer seniors something extra to get and keep their business–that extra 6% our hypothetical HMO spends today. Why would seniors buy it if there wasn’t an incentive to do so?

The whole private Medicare experiment is about the notion that the market can manage Medicare costs better than government-run Medicare. If the private market cannot get a better long-term cost outcome the whole strategy simply is not viable.

The day private Medicare gets the same payments as public Medicare the private sector is going to have to make up for that higher overhead level (11%) and better benefits (6%) by managing to a lower medical cost outcome than government-run Medicare.

Instead of private Medicare operating at 98% of the medical cost level of public Medicare, as our hypothetical HMO does today, my HMO will need to have medical costs at 83% of public Medicare in order to sustain a medical cost ratio 11 points higher than Medicare and 6% in better benefits (100%-11%-6%=83%).

For any private Medicare strategy to be viable post-excess payments to the private plans, the private plans have to beat Medicare’s costs. In my example, which I will suggest is a pretty fair approximation of the market reality, no health plan can sustain its private Medicare business plan unless it can ultimately get its medical costs to about 83% of the government-run Medicare plan. And, that would just be a tie with the public program’s costs. To prove the private market is better than government-run Medicare the result would have to be even better than that.

Most private plans are in the 95% to 100% range today. And, some of the markets they are in have much better payments than the average extra government payment of 13% and 17%.

During this past earnings season about every health plan manager has boasted that Medicare is in their future and they can achieve their earnings objectives while competing head-to-head with the public program.

But for that to happen, the typical HMO needs to reduce its Medicare benefits ratio from 95% to 100% today to about 83% to just match the performance of the government-run plan.

Not a single investment analyst challenged HMO managers on any conference call I heard on how they are going to get from here to there before the Democrats zap the extra payments private Medicare plans now get.

It would seem to me that would be at the crux of whether their private Medicare strategy had any long-term viability.

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3 replies »

  1. 2/21/2010
    Please help the people understand why this force pay within failed insurance groups and there is a better way and this is how, let say that the AARP have 30 million members and the Humanna has 70 million members, so let say that they can earn, AARP $150 million dollars per month and turn over the balance into the United Health Care Forum being built for the people in our Government Health Care plan, In order that the sick can be covered. ..And $ 350 million for the Humana per month. free and clear money…..
    now this tid bit of groups, the top ten insurance groups knee deep in suits,and failures
    The 10 Largest Health Insurers
    (by revenue)
    AARP was not on the list for top ten, but did have a great many suits. So why are they in bed with Government Officials ?
    1.UnitedHealth Group
    2.WellPoint
    3.CIGNA Corp.
    4.Aetna
    5.Anthem, Inc.
    6.Humana
    7.Health Net
    8.PacifiCare Health Systems
    9.Oxford Health Plans
    10.WellChoice
    Hope this helps,
    Barnes@MostChoice
    http://www.mostchoice.com/health-insuran…
    so please tell the people why this dollar is more important than the needs…..
    How many people feel that theses officials jump up and down to get your vote and then a nice little pat on the head and permission given to you to voice a opinion in this Health Care Issue ? Somehow that these 60 members of Government feel that ” we have all the power ” and us little people should be good little boys and girls and let daddy and mama do the job….
    Well, over 9 years have past and theses Officials have sit back on their back sides and did nothing until the dog sneaked up and bit them. And now they attack President Obama and call him a terrorist, within the White House.
    This Health Care Plan must have a job force up and running for theses issues to work. And this creation of Laws for this issue still is not the voice of the people.
    We have built a forum that is the building block of 173 million people, We have placed all within one web site. And I have searched for all the good as well as the bad, and I have not found one insurance company that did not have a suit filed against them from 2003 to 2010
    Henry Massingale
    FASC Concepts in and for Pay It Forward
    http://www.fascmovement.mysite.com on google

  2. Medicare Advantage isn’t going to go away, but Medicare private FFS is certainly in trouble. That’s where most of the growth and profit is, and you can count the remaining life of that program in weeks. It would be a fun exercise to post side-by-side what the health plans tell their analysts about how profitable Medicare private FFS is and what they tell the Congress about how vital these programs are to rural and minority health access to Medicare. The Medicare private FFS program is pure pork, sustained by faith-based dogma about how efficient PPO networks are.
    End Medicare Advantage, however, and you push Kaiser, Group Health of Puget Sound and a lot of other programs who are doing great things for Medicare beneficiaries. It isn’t just the big commercial insurers who participate in Medicare Advantage programs, but a lot of fine local programs and traditional HMO’s.
    It isn’t just people making tons of money arbitraging off of absurdly high local spending like in south Florida.
    These plans ought to be doing a WAY better job of documenting both the additional benefits they provide and the improved health of their subscribers vs. regular Medicare in their markets. If they cannot do that, then it is going to be hard to justify any subsidy whatever above the FFS payment levels. (Remember when people argued that paying them 95% of regular Medicare AAPCC was too high because of favorable risk selection?)

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