Medicare Woes

The Bush administration's Medicare drug plan, designed to specifications set by big insurers such as Humana and United Healthcare, is headed for more turmoil over the next year, and seniors will be the ones to suffer. Why? Because, while a handful of insurers and HMO's may be able to cash in on the program, by cornering enrollment or by drawing seniors into their managed-care programs, many health insurers are not likely to find the program the goldmine they had hoped. Industry consultants, Wall Street analysts, even conservative economists predict a major shakeout of plans, which will leave seniors bewildered and searching for new coverage. And some warn of premium hikes and reduced coverage by the plans that remain in the program.

From day one there have been widespread reports of seniors unable to fill prescriptions and of the poor and elderly being wrongly charged high prices for their medications as pharmacists, health plans, and Medicare officials try to figure out who is enrolled in which plan -- let alone what the provisions of that plan are supposed to be. And even as these problems surfaced, the stage was being set for many others.

The program's outrageously generous provisions for insurers sparked a land rush to enroll seniors. Administration officials laud the fact that there are dozens of health plans for people to chose. But in fact the level of plan competition and the low enrollment by seniors makes it very difficult for many plans to make money, keep premiums low, and have generous benefits. Economist Joseph Antos of the conservative American Enterprise Institute admitted in a February 9 article that “not all plans will survive,” and that high plan turnover will indeed be “disruptive to affected enrollees, particularly if the remaining options offer less generous benefits, have a more restrictive formulary, or require higher premiums than the exiting plan.”

Many smaller health plans will be “road kill,” in the words of John Gorman, a health plan consultant. Many remaining plans will raise premiums or cut back on drugs they cover to stay in the game.

There are two types of health plans in the Medicare drug program: those that are offering just drug coverage and those that provide it as part of an HMO, and both are running into significant problems.

First, there are just too many health plans trying to sign up seniors. Almost 90 organizations decided to provide stand-alone drug coverage, and each one offers several different options. Nationally, there are about 1,500 different plans. In most states, seniors have to choose from more than 40. In addition, in many areas of the country, seniors also have about an equal number of managed-care plans bewildering them.

Medicare chief Mark McClellan thinks this is the good news. He told the Senate Finance Committee on February 8 that this dizzying array of plans has kept prices down, and he said he has no intention of limiting those options.

Dan Mendelson, President of Avalere Health, sees it differently. Mendelson, a former Clinton administration budget official who founded the healthcare consulting company, says plans need certain enrollment levels to be profitable. “There are more plans than anyone anticipated,” he says, and this “reduces the number of people per plan … it makes it harder to spread your fixed costs.”

Also, plans decided to keep their premiums very low in order to attract customers. The average premium is only $37, and more than half of those insurers don't currently require seniors to pay any deductible. But when those premiums were set, the insurers did not know how many competitors they would have, nor how few enrollees there would be.

Many plans also sought out people eligible for both Medicaid and Medicare -- those termed “dual-eligibles'' -- because the government automatically assigned them to plans, which saved insurers marketing costs. But to qualify for these enrollees, health plans were required to charge below-average premiums. The problem, as Mendelson notes, is that these people often have very large drug costs. Still, insurers competed widely for these enrollees, and most states have about a dozen organizations splitting the enrollees. Here again, some plans will not get the critical mass of enrollees they need to be profitable.

All of this means that many health insurers will get out of the Medicare business or drastically reduce the number of plans they offer. AEI's Antos predicts “consolidation is inevitable in this market …” Health plan consultant Gorman agrees, noting, “There are going to be plenty of companies that don't meet numbers, and as a result, can't sustain the business long haul.”

Charles Boorady, a managed care analyst at Citigroup, believes that the “end state in three to five years will be an average of three to four companies offering three or four plan options each within a marketplace.” Boorady believes that a handful of large, efficient companies will end up dominating the program. “Companies that are not chosen by seniors will fold up their tents and go away.”

With all these plans competing for enrollees and with a very sluggish enrollment overall, plans that stay in the Medicare drug program are expected to raise premiums next year. The hikes could be enormous: Premiums could jump 24 percent to 42 percent, according to a study done by Mendelson's Avalere Health. If only 20 percent of those the administration expects to enroll on their own actually do so, premiums will jump a whopping 42 percent. If 60 percent enroll they would still go up 24 percent.

So far, enrollment lags way below administration predictions. In the first three months of enrollment (mid-November to mid-February), only 5.3 million people joined on their own despite extensive advertising and marketing by insurers and Medicare. The administration had predicted that by the end of 2006 there would be 29.1 million enrolled in the Medicare drug plan. But the latest figures released February 22 show only 15.8 million enrolled (not including those in employer plans with Medicare subsidies, but including those who were enrolled because they were on Medicaid or in HMOs). Enrollment for this year closes in two more months.

Seniors are also likely to find their plans cutting back on the drugs they cover. “I think there are a lot of reasons to think that things will tighten up a little in terms of formulary,” says Mendelson, “because a lot of plans did not anticipate how restrictive Medicare would allow their plans to be.”

Drug prices are already rising. A report released February 21 by Rep. Henry Waxman found that after only seven weeks of the program, ten top Medicare insurers have already hiked prices by more than 4 percent on a group of the ten most commonly prescribed drugs.

Gorman predicts even more problems for some of the smaller managed-care companies and those in less populated areas. “There are a lot of newbies in this business that are going to take a beating and are going to end up road kill, and that may happen sooner than people expect,” he said. “The first failures we will see are some of the start-up Medicare Advantage (HMO) plans in some of the more questionable markets.” Many have too little capital invested in their programs, are inadequately staffed, and have little expertise in providing care to seniors.

When the law creating the program passed two years ago, some doubted insurers would flock to it. But the Bush administration asked health plans what it would take to get them in the Medicare game. Officials from major insurers like Humana and United helped Medicare officials write the rules guaranteeing that they would have limited risk if they offered drug-only insurance. HMOs were also given huge pay hikes. Chip Kahn, now head of a hospital association but who used to head the Health Insurance Association of America, for years told Congress that insurers would not offer drug-only plans. He says they had been reluctant to participate because they “didn't think they'd ever get the level of support they did.”

Some insurers hope their drug-only plans will help steer patients into their HMOs, which are more profitable. They followed the lead of Humana, whose CEO told investors last October that its cheap drug plans were “about capturing as much market share as possible at a modest profit, to ultimately migrate those customers.”

Even Humana and other large managed-care players may ultimately rue the day they decided to make a foray into the Medicare business. Congress, concerned about enormous budget deficits, is likely to revisit its sweetheart deal with insurers. In fact, before the drug plan even went into effect last year the Republican-controlled Senate tried to chop $26 billion from future managed-care payments. Only a stealth lobbying effort with House and Senate Republican negotiators staved off the cuts. How long will HMOs keep them at bay? Insurers “have got to be nervous,” says Kahn.

The investment community certainly is. “Wall Street is concerned that the government will starve the goose that's laying the golden eggs,” says Citigroup's Boorady. In fact, stocks of managed-care companies heavily involved with Medicare are valued much lower by money managers than those that are not, he notes.

Plans leaving, confusion reigning, premiums jumping, benefits declining -- this is how the Medicare drug benefit Republicans designed is likely to play out. But it was only last summer, in a little noticed meeting on the Medicare drug benefit, that then-House Majority leader Tom DeLay exhorted 50 of Washington's top business lobbyists to encourage seniors to enroll in the drug program. This would be a boon to seniors who would in turn reward Republicans at the polls this November, he claimed. And once seniors trusted the GOP on Medicare, DeLay predicted, they might be more amenable to privatization of social security.

Just as DeLay's political clout has dissipated over the intervening months, so too have Republican hopes of benefiting from the drug benefit. It's telling that, with newspapers filled with horror stories the day the program started, Bush did not even mention it in his State of the Union address, let alone take credit for it.

By the time the November congressional elections roll around, seniors will have a good idea of how capricious, costly, and threadbare the private-sector drug benefit really is. Voters may grant DeLay his wish and reward Republicans accordingly at the polls.

Barbara T. Dreyfuss is a senior correspondent for The American Prospect.