Last week saw the news that Humana, one of the country's largest health insurance companies, experienced much better second-quarter earnings than had been expected. The announcement amounted to confirmation that the Medicare drug benefit is working exactly as planned -- not for the people enrolled in it, but for the insurers who drafted it.
Humana's profits jumped 10 percent, much better than Wall Street had anticipated, helped by a surge in seniors enrolling in Humana's Medicare drug and HMO plans. Membership in their drug program now stands at 3.46 million, up a million and a half in the last three months. This increase in enrollment brought Humana $801 million in new revenue. Humana has also doubled its Medicare HMO membership in the past year, bringing it to almost a million. The company took in $2.1 billion in premiums from HMO members in the last three months, almost double what the firm received a year ago.
Simply put, the Medicare drug program has been good news for Humana. But for seniors who had hoped that the Medicare drug plan, which began in January, would relieve them of worries about drug costs, things are not so rosy. About one-fifth of seniors in the Medicare program, concentrated especially among the poor who had been on Medicaid, report that they now pay more for their medicines than they had before. Since insurers can decide which drugs they cover and which they won't, many seniors are finding that new medicines they need are not paid for by their plan. And millions of enrollees are now approaching the level of total drug expenses that will provoke a cutoff from any further Medicare help with costs -- the now-infamous "donut hole."
The problems with the program stem from the original motives of the Medicare drug bill's architects. The goal was not to provide comprehensive and inexpensive protection for seniors. Rather, for the Republican congressional leaders that rammed it through Congress in 2003, it was a way to win votes in the 2004 and 2006 elections. Details of the program were only important if they helped assure its passage through Congress.
For the drug companies that spent millions to help enact it, the measure was a way to defuse growing support for drug import legislation. But they were adamant that the program not have price controls.
Meanwhile, for health insurers, who were going to run the program, the issues were more complicated. They hoped to make money in the Medicare drug program, so they wanted maximum freedom in determining what drugs they would cover. But they also wanted government help if new, high-priced medicines drove their costs up too much or they were saddled with too many sick enrollees.
Insurers had for years been strongly opposed to providing drug-only insurance to Medicare enrollees. Company executives and leaders of the Health Insurance Association of America repeatedly testified at Capitol Hill hearings that they would not offer such plans. They did not think companies could make much money on such insurance, and the risks were high. Startup costs would be huge; there would be risk of adverse selection in enrollment; and future drug products and their costs produced too many unknowns.
Because of such reluctance, Republican congressional leaders were determined to give insurers what they wanted to win their full support. Republicans were determined to base the program on free-market principles, with private sector insurers running it. Whatever the cost would be of guaranteeing insurers profits to lure them into the program, however much higher the overhead costs of private firms would be compared with government-run Medicare, whatever freedom insurers wanted to decide what drugs to cover -- all of it would be granted.
Work on drafting a Medicare drug bill based on private-sector plans began soon after Republicans won back control of the Senate in 2002. Since Republican control over the Senate was less secure than the House, congressional leaders decided to let the Senate go first in drafting a bill. Under the direction of Chairman Charles Grassley and two rogue Democrats willing to back a private-insurance plan, Senators John Breaux and Max Baucus, the Senate Finance Committee focused on forging a bill insurers would support.
To a degree rarely seen in Washington, the Senate staff called on insurers to help draft the plan. Lobbyists are often asked what they would like to see in a bill, and even write sections of them. But the collaboration with health insurers on the Medicare drug bill was of a different level altogether, as conversations with staff-level congressional participants attest.
Companies indicated they might offer the Medicare drug coverage only if they had the right subsidies, as well as government guarantees that their risks would be limited. But no one knew which exact mix of subsidies and guarantees would entice insurers into the program. So staffers crafted different models, providing various benefits to companies. The Congressional Budget Office did other models. Companies reviewed them to determine if they could make any money.
But senators were not merely going to take the word of Washington lobbyists that insurers would participate in the program. They wanted guarantees from “the company decision-makers” themselves (in a phrase used by one participant) that they would be an integral part of the push for the bill. Hill staff wanted to talk directly with insurance company CEOs, chief actuaries, and the heads of marketing. If these people signed off on the program, then Congress could enact a company-run benefit.
A handful of major companies had serious discussions with Hill staff. But those insurers that provided direct access to their top decision makers had more say in drafting the bill. “Certain companies had more hands-on discussion with policy makers. They made available their chief actuaries, which is a great service to the Hill,” said one participant in drafting the plan. Humana and PacifiCare (which later merged with UnitedHealth Group) were the most helpful, say those who were part of the effort.
Companies were most concerned that they be protected in the event that they enrolled too many sick seniors in their drug-only insurance plans. They were also worried that new, expensive drugs might soon be developed and raise their costs. So Senate staffers, working closely with Humana and PacifiCare, ended up providing companies with guarantees against extensive losses.
Most importantly, the government guaranteed it would cover plans' losses above certain levels. It would also pick up the majority of a patient's catastrophic drug costs. (The House version of the bill drafted after the Senate's only contained some of these provisions, but key government guarantees -- particularly against excessive risk -- only found in the Senate plan eventually made it into the final conference bill.)
Since the bill's passage, insurers have benefited further from how the Bush administration has implemented the program. For example, while the government is supposed to reclaim excess profits from companies, the administration has built in a profit margin for plans before they have to pay the government anything. Medicare also allows insurers to determine what drugs they cover (within categories) and to drop a drug from coverage virtually at will.
While these provisions were designed to make stand-alone drug coverage profitable, the Medicare drug program also features giveaways to insurers offering the drug benefit through HMOs. Most Medicare HMOs had long provided drug coverage, well before the law required it. And Medicare paid them less than it spent in the traditional system, since HMOs claimed to be more efficient. But, with insurers like Humana helping to write the drug bill, HMO payments were hiked substantially in both House and Senate plans. A congressional advisory panel estimated HMO payments jumped to at least 107 percent of average patient costs in the traditional program.
Humana executives devised a clever game plan for seniors. They would offer inexpensive drug-only coverage and then try to steer these enrollees into Humana's more profitable HMO. Humana's CEO, Michael McCallister, admitted to investors last October that it was offering the cheap drug plans as a way of “capturing as much market share as possible at a modest profit, to ultimately migrate those customers.” Humana enticed their sales representatives to sign up seniors for the HMO program with large commissions. In fact, salesmen were paid twice as much for HMO enrollees as they received for seniors signed up for drug-only plans.
Humana was not only involved in drafting the bill, they also had several former officials in top posts within the Bush administration as the program went into effect. The top Medicare official in charge of selling the program to seniors was Julie Goon, who had set up Humana's Washington office in 1990. When the bill was going through Congress, Goon was in charge of legislative affairs for the health insurance trade group, then named American Association of Health Plans. This June she became President Bush's senior health policy adviser. Goon replaced Roy Ramthun in that post. Ramthun was a top Humana official for eight years, including the time when Congress drafted and passed the Medicare bill.
Humana is optimistic that it will continue to benefit from the Medicare program. McCallister told analysts last week that the Medicare business was “a long-term growth engine” for the company. Indeed, Humana and UnitedHealth/PacifiCare together cover nearly half the seniors who have enrolled in drug plans.
But while insurers like Humana are reaping big benefits from the Medicare drug program's complex, wildly inefficient structure, many seniors haven't been so lucky. A coalition of consumer and labor groups is campaigning for significant changes to the program, and many Democrats and a few Republicans have introduced legislation to make the program work more in beneficiaries favor. Republicans may find that Medicare drug coverage is still an issue at the polls this November -- but not quite in the way they had hoped.
Barbara T. Dreyfuss is a senior correspondent for The American Prospect.
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