By Ida Hellander, David U. Himmelstein, Steffie Woolhandler
International Journal of Health Services, Volume 43, Number 2 / 2013, Posted online May 10, 2013

Abstract:

Previous research has documented Medicare overpayments to the private Medicare Advantage (MA) plans that compete with traditional fee-for-service Medicare. This research has assessed individual categories of overpayment for, at most, a few years. However, no study has calculated the total overpayments to private plans since the program’s inception. Prior to 2004, selective enrollment of healthier seniors was the major source of excess payments. We estimate this has added US$41 billion to Medicare’s costs since 1985. Medicare adopted a risk-adjustment scheme in 2004, but this has not curbed private plans’ ability to game the payment system. This has added US$122.5 billion to Medicare’s costs since 2004. Congress mandated increased payment to private plans in the 2003 Medicare Modernization Act, which was mitigated, to a degree, by the subsequent Affordable Care Act. In total, we find that Medicare has overpaid private insurers by US$282.6 billion since 1985. Risk adjustment does not work in for-profit MA plans, which have a financial incentive, the data, and the ingenuity to game whatever system Medicare devises.

How Does Medicare Overpay Private Plans?

1. The selective enrollment of healthier beneficiaries before 2004, or what we will call “old cherry-picking.” Under the payment formula in effect until 2004, Medicare paid private plans a premium that was risk-adjusted only for a few demographic factors, such as age, gender, disability, whether an enrollee resided in a nursing home, and Medicaid eligibility (a proxy for poverty). Hence a healthy 70-year-old man would bring the same premium as his sicker, 70-year-old neighbor. Private plans used marketing, benefit design, enrollment office location, and other techniques to recruit the healthy and discourage sicker seniors from enrolling.

2. Gaming of Medicare’s more complex risk-adjustment scheme, known as Hierarchical Condition Categories (HCCs). Since 2004, private plans have been selectively enrolling beneficiaries with very mild cases
of the medical conditions included in the HCC risk-adjustment formula; such patients have, on average, substantially lower costs than the risk-adjusted premium payment that Medicare pays the private plan on their behalf. We refer to this as “new cherry-picking.”

3. Congressionally-mandated overpayments included in the 2003 Medicare Prescription Drug, Improvement, and Modernization Act (MMA), including duplicate payments for indirect medical education. The provisions that generated this overpayment were tacked onto the MMA after heavy lobbying by the private insurance industry.

4. Bonus payments from the $8.35 billion CMS Medicare Advantage Quality Bonus Payment Demonstration, an expansion of the $3 billion in quality bonuses contained in the ACA. This demonstration will award bonuses to plans covering more than 90 percent of MA beneficiaries and offset more than one-third of the cuts to MA overpayments mandated by the ACA between 2012 and 2014. According to the General Accountability Office (GAO), the demonstration is so poorly designed that it will generate almost no useful findings to improve quality.

5. Duplicate payments for private plan members who receive all or part of their care at Veterans Health Administration (VA) facilities. Medicare pays the private plan a full premium payment, no matter how much of the patient’s care is delivered (and paid for) by the VA. In an extreme case, a senior might receive all care at the VA, making the premium given to the private plan pure profit. In 2009, 8.3 percent of all MA enrollees were enrolled in the VA.

Conclusions

Advocates of market-based Medicare reforms suggest that competition among private plans will induce greater efficiency and result in cost savings. Our findings indicate that the opposite is true. Private plans have drained more than $280 billion from Medicare since 1985, most of it in the last eight years. Increasing private enrollment through voucher-type Medicare reform (as suggested by Republicans) or through quality bonuses and financial incentives to plans to enroll dual-eligible beneficiaries (as enacted by President Barack Obama’s administration) will almost certainly raise Medicare’s costs, not lower them.

Funds wasted on overpayments to private MA plans could instead have been used to improve benefits for seniors, extend the life of the Medicare Trust Fund by more than a decade, or reduce the federal deficit. Private insurers have enriched themselves at the expense of the taxpayers.

It is time to end Medicare’s long and costly experiment with privatization. The U.S. needs to adopt a single-payer national health insurance program with proven, effective methods for controlling costs.

http://baywood.metapress.com/app/home/contribution.asp?referrer=parent&backto=issue,7,11;journal,1,170;linkingpublicationresults,1:300313,1  (you may have to cut and paste this link)

Comment:

By Don McCanne, M.D.

Now we know that the private Medicare plans have been overpaid $282 billion in taxpayer funds. The Obama administration has continued to add to the overpayments by expanding eligibility for extra quality award payments to which the plans were not entitled, and by using a bookkeeping gimmick for suspended SGR adjustments. Congress and the administration, in using our taxpayer funds to reward this unprincipled industry, should pay a political price for their misdeeds.

Centers for Medicare and Medicaid Services, May 8, 2013

New data released today show significant variation across the country and within communities in what hospitals charge for common inpatient services.

“Currently, consumers don’t know what a hospital is charging them or their insurance company for a given procedure, like a knee replacement, or how much of a price difference there is at different hospitals, even within the same city,” Secretary Sebelius said.

These amounts can vary widely.  For example, average inpatient charges for services a hospital may provide in connection with a joint replacement range from a low of $5,300 at a hospital in Ada, Okla., to a high of $223,000 at a hospital in Monterey Park, Calif.

“Transformation of the health care delivery system cannot occur without greater price transparency,” said Risa Lavizzo-Mourey, M.D., RWJF president and CEO.

http://www.cms.gov/apps/media/press/release.asp?Counter=4596

Medicare Provider Charge Data: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Medicare-Provider-Charge-Data/index.html

Comment:

By Don McCanne, M.D.

So now we have access to hospital chargemaster prices – meaningless numbers that nobody pays. And that is going to make us better health care shoppers?

What matters are payments, not prices. Actual payments are negotiated prospectively by private insurers, and even more effectively by Medicare. Cash paying patients usually feebly attempt to conduct negotiations retroactively, if they pay at all.

This CMS effort on hospital price transparency will have almost no impact on controlling total health care spending since chargemaster prices are a fabrication.

There is a far better way to control spending without forcing patients to make unwise health care decisions in their efforts to avoid the financial burdens of health care. Each hospital should be placed on a global budget, just as we do with our police and fire departments. That way, services are rendered simply when needed, without having an associated price tag.

Requiring price shopping as a prerequisite to health care access is anathema to health care justice.

By Sen. Bernie Sanders
Politico, May 7, 2013

The American approach to primary health care is one of the more glaring failures of a dysfunctional health care system that costs almost twice as much per capita as that of any other major country — often with worse results.

Instituting major reforms in primary care and enabling people to see a doctor when they need one will save lives, ease suffering and save billions of dollars in wasteful health care costs. What should we do?

First, we need to substantially increase the number of primary-care practitioners. In most countries, about 70 percent of doctors practice primary care while 30 percent are specialists. We have it backward. Only 30 percent of doctors in America practice primary care.

Second, we must implement a major change in the culture of our medical schools. Some medical schools do an excellent job educating primary-care physicians, but too many do too little and some — believe it or not — do nothing at all. In 2011, about 17,000 doctors graduated from American medical schools. Only 7 percent of those graduates chose a primary-care career.

Third, we need to greatly expand the Federally Qualified Health Center program which today provides high quality and affordable health care, dental care, mental health treatment and low-cost prescription drugs to 22 million Americans, regardless of income. This is a program that provides some of the most cost-effective health care in the country and serves as a medical home for millions with nowhere else to go.

Finally, we should greatly expand the National Health Service Corps, which provides loan-forgiveness and scholarships to students who are prepared to provide medical, dental and mental health care in underserved areas. Like the community health center program, the health service corps has expanded in recent years. In 2012, the corps provided financial help to nearly 10,000 clinicians, nearly three times more than in 2008. That’s a good step forward, but nowhere near enough.

The bottom line is that we need a revolution in primary health care services and accessibility.

(Sen. Bernie Sanders (I-Vt.) is chairman of the Subcommittee on Primary Health Care and Aging of the Senate Health, Education, Labor and Pensions Committee.)

http://www.politico.com/story/2013/05/doctors-physician-shortage-calls-for-intervention-91024.html

Comment:

By Don McCanne, M.D.

Every expert understands the pressing need to reinforce our primary care infrastructure – a need that grows more urgent with the implementation of the Affordable Care Act. The inevitable transformation into a single payer system will be much smoother if we already have a high-performance primary care infrastructure in place.

Sen. Bernie Sanders provides us with a framework for expanding that system. It’s too bad that we don’t have a Congress that is willing to support the reforms that we need. We need to keep Sen. Sanders and his allies and replace the rest of them.

Health Affairs, May 2013

Medicare Essential: An Option To Promote Better Care And Curb Spending Growth

By Karen Davis, Cathy Schoen and Stuart Guterman

We describe a new option we call Medicare Essential, which would combine Medicare’s hospital, physician, and prescription drug coverage into an integrated benefit with an annual limit on out-of-pocket expenses for covered benefits. Cost sharing would be reduced for enrollees who seek care from high-quality low-cost providers. Out-of-pocket savings from lower premiums and health care costs for a Medicare Essential enrollee could be $173 per month, compared to what an enrollee would pay with traditional Medicare, prescription drug and private supplemental coverage. Financed by a budget-neutral premium, we estimate that this new plan choice could reduce total health spending relative to current projections by $180 billion and reduce employer retiree spending by $90 billion during 2014–23. Given its potential, such an alternative should be a part of the debate over the future of Medicare.

http://content.healthaffairs.org/content/32/5/900.abstract

Supplemental Coverage Associated With More Rapid Spending Growth For Medicare Beneficiaries

By Ezra Golberstein, Kayo Walsh, Yulei He and Michael E. Chernew

Supplemental coverage makes health care more affordable for beneficiaries but also makes beneficiaries insensitive to the cost of their care, thereby increasing the demand for care. We found that supplemental insurance coverage was associated with significantly higher rates of overall spending growth. Specifically, employer-sponsored and self-purchased supplemental coverage were associated with annual total spending growth rates of 7.17 percent and 7.18 percent, respectively, compared to 6.08 percent annual growth for beneficiaries without supplemental coverage. Results for Medicare program spending were more equivocal, however. Our results are consistent with the belief that current trends away from generous employer-sponsored supplemental coverage and efforts to restrict the generosity of supplemental coverage may slow spending growth.

http://content.healthaffairs.org/content/32/5/873.abstract

Public Financing Of The Medicare Program Will Make Its Uniform Structure Increasingly Costly To Sustain

By Katherine Baicker, Mark Shepard and Jonathan Skinner

In this article we describe a model incorporating the benefits of public programs and the cost of tax financing. The model implies that the “one-size-fits-all” Medicare program, with everyone covered by the same insurance policy, will be increasingly difficult to sustain. We show that a Medicare program with guaranteed basic benefits and the option to purchase additional coverage could lead to more unequal health spending but slower growth in taxation, greater overall well-being, and more rapid growth of gross domestic product.

Our model thus helps explain the rapid growth in US health care expenditures relative to other countries. More important, the model highlights the trade-offs in different approaches to reining in public spending — from the current approach of providing a uniform benefit that increasingly crowds out other programs, to a less egalitarian model that guarantees only a basic benefit and redirects some redistribution toward other programs.

Our analysis suggests that the policy of providing a uniform benefit to all — rather than a basic benefit that higher-income residents can augment — may be increasingly untenable if health care expenditures continue to rise.

Other excerpts:

Why has the United States diverged so dramatically from its counterparts? This divergence is probably not explained by commonly cited factors such as administrative costs — already high by the 1980s — or physician salaries, which have stagnated over the past decade.

The implications of our model are not dissimilar to the idea of voucher-type premium support suggested over the years by Ezekiel Emanuel and Victor Fuchs, Henry Aaron and Robert Reischauer, and Rep. Paul Ryan (R-WI). Indeed, it may appear that this plan most closely resembles a Ryan-style premium support plan.

Our “basic” plan does not correspond so much to a high-deductible or higher-cost-sharing plan, but rather to one that covers a more limited set of treatments or providers. Unlike high-deductible plans, the basic plan need not expose poorer households to the risk of substantial cost sharing. Instead, it is designed to limit coverage to treatments with proven effectiveness at a reasonable cost. Of course, identifying which treatments are of high value — and for which patients — poses substantial challenges.

Perhaps the greatest challenge to offering this kind of plan choice more widely in Medicare is that it would require setting aside the egalitarian goals enshrined in the Medicare legislation of 1965. Publicly providing only basic coverage would implicitly recognize that higher-income households would probably elect to procure more generous coverage — and, ultimately, to obtain more health care and possibly better health outcomes.

http://content.healthaffairs.org/content/32/5/882.abstract

Background paper (40 pages): “Optimal Healthcare Spending with Redistributive Financing”

http://www.dartmouthatlas.org/downloads/papers/ShepardBaickerSkinner_OptimalHealthSpending.pdf

Three Large-Scale Changes To The Medicare Program Could Curb Its Costs But Also Reduce Enrollment

By Christine Eibner, Dana P. Goldman, Jeffrey Sullivan and Alan M. Garber

With Medicare spending projected to increase to 24 percent of all federal spending and to equal 6 percent of the gross domestic product by 2037, policy makers are again considering ways to curb the program’s spending growth. We used a microsimulation approach to estimate three scenarios: imposing a means-tested premium for Part A hospital insurance, introducing a premium support credit to purchase health insurance, and increasing the eligibility age to sixty-seven. We found that the scenarios would lead to reductions in cumulative Medicare spending in 2012–36 of 2.4–24.0 percent. However, the scenarios also would increase out-of-pocket spending for enrollees and, in some cases, cause millions of seniors not to enroll in the program and to be left without coverage.

http://content.healthaffairs.org/content/32/5/891.abstract

Additional Reductions In Medicare Spending Growth Will Likely Require Shifting Costs To Beneficiaries

By Michael E. Chernew

The Affordable Care Act created a projected trajectory for Medicare spending per beneficiary that is lower than historical growth rates. Although opportunities for one-time savings exist, any long-term savings from Medicare, beyond those already forecast, will probably require a shift in spending from taxpayers to beneficiaries via higher beneficiary premium contributions (overall or via means testing), changes in eligibility, or greater cost sharing at the point of service.

http://content.healthaffairs.org/content/32/5/859.abstract

Comment:

By Don McCanne, M.D.

At a time when our politicians have decided to open discussions on reducing government spending in Medicare, it likely is no coincidence that this cluster of articles on ways of reforming the financing of Medicare appears in the leading journal of health policy – Health Affairs. But beware; the thrust of most of the articles should raise our concerns.

The most alarming articles are the pair from Katherine Baicker and her colleagues. They support unlimited care with “better health outcomes” for higher-income households, with only “basic” care for for the rest of us, even though they note that defining basic c
are “poses substantial challenges.” Class division in health care seems to be a uniquely American concept. “It would require setting aside the egalitarian goals enshrined in the Medicare legislation of 1965.”

The article by Ezra Golberstein and his colleagues calls for diminishing the financial protection offered by supplemental Medigap and retiree health benefits “to restrict the generosity of supplemental coverage,” making beneficiaries more sensitive to the cost of their care, even though “results for Medicare program spending were more equivocal.” Feeling the pain of their health care spending seems to be the policy goal even if the total reduction in Medicare spending is only nominal.

Christine Eibner and her colleagues propose, “imposing a means-tested premium for Part A hospital insurance, introducing a premium support credit to purchase health insurance, and increasing the eligibility age to sixty-seven” as three means of reducing overall Medicare spending, even though these measures would shift costs to the beneficiaries and cause perhaps millions of them to withdraw from Medicare and remain uninsured.

Michael Chernew keeps it simple. Lowering the projected trajectory for Medicare spending “will probably require a shift in spending from taxpayers to beneficiaries via higher beneficiary premium contributions (overall or via means testing), changes in eligibility, or greater cost sharing at the point of service.” In other words, reduce the tax transfer by sticking it to the seniors.

We can thank Karen Davis, Cathy Schoen and Stuart Guterman for not causing us to lose all hope. Their proposal – “Medicare Essential” – is designed to increase the coverage and efficiency of Medicare. They would combine the hospital Part A, physician Part B, and drug Part D programs into a single program with less administrative complexity. They would also add much needed catastrophic coverage by placing a maximum on out-of-pocket expenses. They would also fold in the benefits of supplemental plans eliminating the need for wasteful, superfluous Medigap and retiree health plans. Their proposal would actually reduce spending for most Medicare beneficiaries while enhancing the benefits.

They would leave in place the flawed Medicare Advantage plans, although competing with a truly superior public plan could make them obsolete – the goal of “the public option.” They would have the deductible apply to Part A, opening the treacherous territory of a path for more cost shifting to beneficiaries. Also they do not mention that Medicare Essential could eventually be expanded to include everyone, becoming an improved Medicare for all. There are many other important features of the PNHP version of the single payer model that they do not address, and that we won’t mention here. Suffice it to say, that Medicare Essential is only a tiny though important step in the direction in which we should be headed.

For incrementalists, Medicare Essential should captivate you. For those of us who are impassioned single payer supporters, we should continue to advocate for moving the political process forward toward achieving an Improved Medicare for All single payer program as soon as possible.