Medicare Overpayments To Private Plans, 1985–2012: Shifting Seniors To Private Plans Has Already Cost Medicare $282.6 Billion

Source: Ida Hellander, David U. Himmelstein, and Steffie Woolhandler, International Journal of Health Services, Vol. 43 no. 2, 2013

From the press release:
A study published online today finds that the private insurance companies that participate in Medicare under the Medicare Advantage program and its predecessors have cost the publicly funded program for the elderly and disabled an extra $282.6 billion since 1985, most of it over the past eight years. In 2012 alone, private insurers were overpaid $34.1 billion. That’s wasted money that should have been spent on improving patient care, shoring up Medicare’s trust fund or reducing the federal deficit, the researchers say….

Medicare has contracted with private insurance plans – previously referred to as Medicare HMOs and now called Medicare Advantage plans – since 1985. Such plans, most of them for-profit, currently cover about 27 percent of Medicare enrollees and have been growing at a fast clip. UnitedHealth and Humana are among the largest players in this market, and together operate about one-third of such plans.

Medicare pays these privately run plans a set “premium” per enrollee for hospital and physician services (averaging $10,123 in 2012) based on a prediction of how costly the enrollee’s care will be. The authors find that private insurers have four strategies that make them more costly than the traditional Medicare program.

1. Private plans cherry-pick healthier beneficiaries who cost less to care for, guaranteeing large profits. Although private plans must accept all seniors who choose to enroll, they cherry-pick by selectively recruiting the healthiest seniors through advertising, office location, etc. They also induce sicker ones to disenroll by making expensive care inconvenient.

2. They recruit otherwise healthy seniors with very mild (and inexpensive) cases of sometimes serious conditions – automatically triggering higher premiums for these beneficiaries from the risk-adjustment scheme implemented in 2004, but escaping payments for expensive care. For instance, many seniors have very mild cases of arthritis, heart failure and bronchitis that require little or no treatment.

3. They enroll patients who get most of their care free at the Veteran’s Administration.

4. They heavily lobby Congress to raise their reimbursement. The insurance industry successfully induced Congress and the Bush administration to add bonus payments to Medicare Advantage premiums beginning in 2003.