Bloomberg News

Medicare Advantage May Weather Cuts Under New Law

April 23, 2010

April 23 (Bloomberg Government) -- Medicare Advantage plans, private insurance for the elderly, may survive losing $136 billion in government subsidies under President Barack Obama’s health-care law.

Stephen J. Hemsley (UNH:US), chief executive officer of UnitedHealth Group Inc., told analysts on an earnings call this week that reduced payments won’t keep the company’s products from competing with Medicare insurance offered directly from the government. Kathleen Sebelius, the Health and Human Services secretary, told a House Appropriations subcommittee that she expects “a robust array of choices for Medicare recipients.”

Hemsley was outlining a strategy to investors and analysts while Sebelius was fending off Republican attacks on the overhaul legislation and soothing the elderly. A survey this month by the Kaiser Family Foundation, a philanthropy that studies health-care issues, found that 45 percent of people 65 and older are “angry” about the legislation.

“Sebelius is right” about Medicare Advantage, said Elizabeth A. McGlynn, associate director of Rand Health at the Rand Corp., a research institute in Santa Monica, California. “We’re going to see a variety of responses from plans. We may see plans that choose to go out of the business, and I think we’ll see plans that get very creative in how they choose to position themselves.”

Pricing Power

Insurers offering the plans could pressure health providers to lower their prices, McGlynn said. Also, Senate Democrats and the White House “did some smart things” to mitigate the effect of the Advantage cuts in the final version of the health law, said Robert A. Berenson, a former Medicare official now at the Urban Institute, a research foundation in Washington.

The law lets Advantage plans operating in areas where Medicare’s costs are lower than private insurers’ costs be paid more than the government program, said Berenson, who served in the Clinton administration. Plans where Medicare’s costs are higher than private insurers’ costs would get less.

Beginning in 2014, Advantage plans can earn 5 percent bonus payments if they implement programs to improve the health of their customers or the efficiency of care, he said. Insurers could qualify if they created programs to manage chronic diseases, for example, or new payment systems for doctors.

“To the extent some plans can’t make it, they probably don’t deserve to make it,” Berenson said. “This is competition, I think. There should be plenty of room for good plans.”

Lower Fees

About 11 million elderly, or 24 percent of all beneficiaries, used Medicare Advantage plans, according to the Medicare Payment Advisory Commission a panel that analyzes the program for Congress and makes recommendations.

The two largest U.S. health insurance companies, UnitedHealth, based in Minnetonka, Minnesota, and WellPoint Inc. (WLP:US), based in Indianapolis, sell Advantage plans. Smaller rivals offering the coverage include Humana Inc. (HUM:US), based in Louisville, Kentucky.

The health legislation would cut payments to the Advantage plans by about $136 billion over the next 10 years, the Congressional Budget Office says. The reduction is necessary to help pay for the law’s expansion of health insurance coverage to about 32 million people younger than 65 who would otherwise lack it. The budget office says the law will cost about $940 billion over the next decade.

Obama and congressional Democrats targeted the private plans for reductions early in the health debate, arguing that the programs received excessive payments. That sparked a fight with insurers and gave Republicans a way to target elderly voters. The present form of Advantage plans arose from 2003 legislation under President George W. Bush.

‘Disruption’ for Elderly

While the Advantage cuts in the final law aren’t as deep as earlier proposals, the industry’s trade group says the reductions will hurt.

“These very severe cuts will inevitably cause disruption for seniors, and particularly for seniors who count on health plans’ value-added services that emphasize prevention and wellness, coordination of care, and better management of chronic conditions,” said Mike Tuffin, a spokesman for America’s Health Insurance Plans, the trade association, in an e-mailed statement.

The nonpartisan Congressional Budget Office, in a March 19 analysis of the health-care legislation, did estimate that enrollment in the private plans would drop to about 9.1 million by 2019, a 17 percent reduction from now. Medicare’s chief actuary, Richard S. Foster, estimated a drop to 7.4 million.

Angry Elderly

“This bill takes health-care benefits away from seniors who are on Medicare Advantage,” Senator Jon Kyl, Republican of Arizona, said in a floor speech March 24. “That is the truth.”

The 45 percent of elderly in the Kaiser poll found to be “angry” over the law compares with 26 percent of people younger than 65. Less than a third, 32 percent, of the elderly had a favorable opinion of the law, compared with 49 percent in the younger group. The telephone survey was conducted April 9- 14. The data on the elderly were taken from a larger survey that had a margin of error of 3 percentage points.

People enrolled in the private plans have their benefits paid for by a private insurer, instead of by the government. Many of the plans offer lower co-payments and greater benefits than the government program, according to Medicare’s administrators. That may include gym memberships and discounts on hearing aids and eyeglasses. Some are managed-care plans that limit their customers’ selection of doctors and hospitals.

UnitedHealth Profits

The government pays the plans a fee for each customer. The Medicare Payment Advisory Commission estimates that Medicare Advantage plans will be paid about 9 percent more for each beneficiary in 2010 than traditional Medicare’s costs.

Advantage plans contributed to a 21 percent increase in first-quarter net income at UnitedHealth, the company reported April 20. The number of Advantage policies the company wrote rose 18 percent, offsetting a decline in commercial policies.

“We have said for some time now that our Medicare Advantage business must ultimately be able to perform better than fee-for-service Medicare on a comparable-benefits basis and with care quality considered,” Hemsley said on a conference call the day earnings were reported. “We believe we can achieve and sustain that standard in the majority of our local markets.”

The company also sees opportunities to sell products through AARP, the lobbying group for people 50 and older, he said. The group receives royalties from UnitedHealth in exchange for the company’s use of the AARP brand on Medicare Advantage and Medicare supplemental plans.

AARP Alliance

The Obama administration also has an alliance with the AARP, which endorsed the health-care revamp. Congressional Republicans, in a letter to Hemsley this week, asked for details on the insurer’s relationship with AARP.

Sebelius’ department held an online chat this week with government officials and AARP president Jennie Chin Hansen. One person who submitted a question for the chat asked about a rumor that Medicare Advantage would disappear by 2014.

“That is simply not true,” replied Jonathan Blum, director of the Center for Medicare Management, a Medicare agency.

To contact the reporter on this story: Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Michael Riley at mriley17@bloomberg.net.


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