I was the Medicare Marketing Director at a private for profit health insurance company in the late 1980’s and early 1990’s and the first attempt to privatize Medicare during the Reagan Administration. That job made me the ardent consumer advocate I have been ever since. What I learned then is happening again now in a slightly different way. It is not good news for seniors. Here’s why:
Congress and Medicare
Congress oversees Medicare coverage as well as mandated commercial insurance coverage. It required an act of Congress for Medicare to cover preventive services, such as mammograms or prostate screenings. Kidney dialysis coverage for End Stage Renal Disease required an act of Congress. Mental health was added as an insurance benefit in 2008 with the Mental Health Parity act. Expanded mental health and addiction coverage was added as part of the Affordable Care Act. All required Congressional action. Medicare covers what Congress allows in statutory language or specific legislation. For example, adding prevention coverage or prohibiting Medicare from negotiating prices with pharmaceutical companies. Physician fees for doctors who accept Medicare patients are set by a committee that was authorized by Congress.
The new Medicare Voucher proposal, from the little we know as currently proposed, would give each senior a ‘capitated’ or flat fee in the form of a Voucher/subsidy. Seniors would use their Voucher to buy Part A and B coverage from traditional (current) Medicare or buy Medicare benefits (Part A and B) from a private insurance company. Insurance companies and Medicare would compete on price and benefits. Medicare Part A has set benefits and allowable co-payments for hospitalizations and day limits on skilled nursing home care. Traditional Medicare Part B has a range of coverage and price options and choices. Until Part D became law, Medicare did not include pharmaceutical coverage. Insurers can offer more services than the basic Medicare benefits and they also set patient co-payments and cost sharing. The Part C Medicare Advantage plans are managed care plans rather than fee for service. They combine both A and B and often Part D (prescriptions). Medicare Advantage plans currently receive a subsidy to attract seniors into these programs which are considered to be more cost effective.
Vouchers change the role of private insurance in Medicare. The proposed changes are remarkably similar to the earlier Medicare privatization program, including its problems. The difference now is all seniors would get a flat fee (Voucher) to choose between traditional (current) Medicare and private insurance plans. Previously these new plans were voluntary and not all seniors were required to participate. Medicare oversaw these plans. What is not clear is if there is an oversight role Medicare will have, if any, in a universal privatization plan. Currently, Medicare is the only health insurance program (not counting the VA) that has national regulations and oversight, except for some solvency standards. Even Medicaid varies a great deal state by state.
Some current fears are that the healthy seniors will be attracted to the private plans and sicker seniors who use more services will remain in traditional Medicare. This could further erode the Medicare Trust Fund without healthier seniors who use fewer services. For insurance to work, healthy people are needed to off-set the costs of sick people. If only sick seniors remain in Medicare, Medicare will eventually run out of money or be too expensive to sustain.
The attempt to privatize Medicare caused havoc in the late 1980’s and early 1990’s. It could cause havoc again in different ways.
Here’s How the First Privatization Played Out
The way to control cost by privatizing was to create new managed care ‘risk’ contracts (also known as prospective payments). These new Medicare HMO’s and other managed care plans had specific networks of hospitals and doctors. The new program was attractive, but Managed care was relatively new to both insurers and consumers at the time, except for some long standing plans, such as Kaiser Permanente or Group Health of Puget Sound, among others.
These new Medicare ‘risk contract’ plans received 95% of what Medicare would have paid for Medicare enrollees. In return for that 95%, the plans had to cover all Medicare benefits. They could offer more benefits, but not less. The plans were ‘at risk’ financially to provide Medicare services within a specific budget. If insurers managed well, they kept the profits. If it did not work out well, the plans lost money. The problem was most insurers knew almost nothing about how managed care worked.
My company, like others, received money from Medicare every month based on the county rates and the number of people enrolled. The new ‘per member per month’ payment was lucrative. Our plan received $492.23 per person each month to cover Medicare Part A and B, or nearly $6,000 per year per person. Companies with more members received millions. With 60,000 seniors, a plan could receive nearly $360 million per year.
In the 1990’s 52% of all Medicare enrollees used services that were less than $1,000 per person per year.
Today According to Medicare: “Most people don’t pay a monthly premium for Part A (sometimes called “premium free Part A). If you buy Part A, you’ll pay up to $413 each month.”
Plans needed healthy people to make money. Our company sold our program as being strong on preventive care which was not covered by Medicare at that time. Insurers across the country began offering plans with no premiums and free drugs to attract more members. The only condition was that seniors had to use the plan’s doctors and hospitals. In most cases this meant enrollees had to change doctors.
The lure of no premiums and free medications, however, was an irresistible draw to many seniors. They began to sign up in droves, especially poorer often less healthy seniors.
For awhile, the companies that offered free premiums made out like bandits with regular the per member per month income. They received payments from Medicare whether people used services or not. This model worked until too many people used services and ruined the company’s profits.
Insurance is the Law of Large Numbers
For insurance to be profitable, healthy people are needed to offset the cost of people who use services. If too many people joined that paid no premiums and had free prescriptions but used the services offered it was not possible for the company to keep afloat financially. The free premium plans attracted more people with health needs who needed both services and prescriptions, thereby making the plan financially unsustainable unless it had a broad base of healthy seniors. Before this cost scenario caught up with them, the early plans profited. But as more people used more and more services many plans went out of business or closed their Medicare line of business leaving hundreds of thousands of seniors in the lurch even after they had paid money for the promised services. Some plans moved members to fee for service plans with higher premiums. Some plans went bankrupt. A few executives even took their profits and left the country to avoid prosecution.
The stated goal of those new Medicare HMOs was to demonstrate that the private sector could offer better services more efficiently and for less cost than Medicare itself. In fact, the opposite happened.
A Snapshot: How Our Plan Worked
My job was to convince seniors to enroll in our plan. Our plan chose the hospitals and doctors in each community. Participating hospitals and doctors also shared in the financial gain and risk. Most hospitals and doctors we recruited had never been in managed care plans before and knew little to nothing of how to organize an effective managed care plan.
All marketing materials had to be approved by the HCFA (Health Care Financing Administration, now CMS). Plans could not use claims such as “the best” or “government approved.” Our plan advertised in neighborhood papers because seniors were more likely to read them. These papers had the added advantage of being cheaper than major metropolitan papers. Less marketing costs meant more money. We held meetings to get people to sign up. We used telemarketing calls to follow up and close the deal if seniors did not sign up on the spot.
We held meeting at our hospitals and featured free refreshments. We used only one hospital in each community. Free refreshments and our promise of low premiums and greater simplicity brought people to the meetings. We explained the plan, answered questions and gave enthusiastic pitches to join. We assured seniors we could take care of all their Medicare needs without the hassle of numerous bills from doctors and hospitals.
What Actually Happened
To make money our plan, like all others, needed healthy seniors. We pitched our preventive care programs before Medicare covered preventive services. Our meetings were held where most people needed to be relatively mobile to attend. If someone asked about cardiologists, we told them they would have to use our cardiologist. The same held true for respiratory illnesses, diabetics, and those already in wheelchairs. The big stumbling block for many seniors was changing their doctor.
We pitched that we had recruited both the doctors and hospitals, and that they were, therefore, good because they had been reviewed and chosen—that they had our seal of approval. We stressed we had a contract with Medicare, so enrollees would not lose any Medicare benefits. We told them we could take care of them because we had an approved contract with Medicare, a respected, trusted and financially secure program. The implication was that our doctors and hospitals were also approved by Medicare, which was not true. We alone chose them. We did not need Medicare approval to select hospitals, they just had to be financially solid. We needed Medicare approval to show our projected enrollment and budget and fiscal solidity.
Once people joined the plan, members’ use of services was closely monitored. We had a medical committee that reviewed doctors’ cases. Many doctors at the time were new to managed care, so the medical staff trained them to be sure they were providing appropriate care medically and financially. Much of this was good, but not all. We promised to cover everything Medicare covered and we did. But, we organized that care differently. I hasten to add those new plans were not the ethical and long established managed care organizations that had provided managed care services for a long time, such as Kaiser Permanente in California and Group Health of Puget Sound, others in other states like Minnesota and New York. The new plans were babes in the woods.
Even though our plan and many others had a commercial line of business to offset the costs of seniors who used services, we still needed healthy seniors who would not use many services. We did not want people who needed to see cardiologists. If people kept asking about cardiologists or other specialists we said we would get back to them, but somehow never managed to do so. Our marketing promised everything to get people to enroll, and then carefully ‘managed’ their care and use of services. My conscience finally caught up with me and I left and became a consumer advocate. I think the plan eventually folded or was purchased by another company.
In the end, many of these new plans went out of business because they focused on money, but did not know how to manage effectively. Others struggled. Some merged. Others that were initially profitable later closed their doors leaving hundreds of thousands of seniors in the lurch. Some converted members to their fee for service plans with higher premiums. Some plans even tried to sue the Health Care Financing Administration (now CMS). Executives in a few plans even took off out of the country taking their profits with them. This way they also avoided federal prosecution.
Questions about the Future
Current proposals to privatize Medicare by using Vouchers raise many questions. What can people really buy? Who sets the premiums and service prices? Will “Medicare Allowable Costs” be eliminated for physician fees and other services? Insurance companies can set premiums and co-payments. Medicare is prohibited from negotiating prices with drug companies. Insurers decide what patient co-payments will be. Currently Medicare establishes allowable charges, it that changes, how much would services costs and what can that new subsidy really buy?
There is more experience now with managed care and Medicare Advantage plans and they have worked well. Marketing, however, can still be a shell game. Some plans promoted having special free services when in fact those services were already a Medicare benefit, not an add on. Medicare does not consider costs when a adding a new technology, nor can it negotiate drug prices. Insurers negotiates those prices. Large insurers have better bargaining power than small insurers. Will a few large plans dominate the market because of their buying and negotiating powers?
Physicians are prohibited from accepting cash payments now if they accept Medicare patients. They are also prohibited from ‘balance billing’ for the difference between Medicare’s Allowable Charges and their non-Medicare patient fees. It is not clear if Medicare Allowable Charges would remain. If it is eliminated seniors could face higher costs depending on the size of the insurer or whether or not the plan is a managed care or fee for service.
Some Final Thoughts
When thinking about Vouchers it is important to ask what these Vouchers will actually buy. What is the actual subsidy seniors will receive? What happens to Medicare Allowable Charges? What marketing enticements will plans promise? Will there be oversight? Will most seniors even know what questions to ask?
Most seniors trust Medicare. But, Medicare is complicated. In a disturbing move, the program that educates seniors on various plan options, such as Part B, Part C or even Part D benefits may disappear. The Senior Health Insurance Program is targeted to be eliminated in a line item in the proposed budget reconciliation. This budget process means may provisions do not receive much media attention. Does eliminating the program mean seniors must rely solely on private brokers or must they make decisions themselves for very complicated coverage and financial choices?
Medicare is complex. Its complexity came from Congress’ goal to control costs. Cost containment goals are simply goals to contain costs. They have little or nothing to do with access to or the quality of care. It was not until the Affordable Care Act that hospitals could be fined for unnecssary re-admissions and poor quality care. Ultimately goals of containing costs are simply moving red lines in the sand when cost is the only consideration.
The hard questions needs to be asked: Will Vouchers really contain costs? Shouldn’t the question be the best way to provide effective care for seniors? Who really benefits from a new system that puts the burden of choice in a complex and costly system in the hands of seniors who will have to rely solely on marketing promises to make a decision? What choices will seniors have? Will they understand their choices or what they even mean? Health care is very complicated even when people are not on Medicare. Are there really choices when you don’t understand what you are choosing or what it offered?
Once again, despite marketing claims, if something looks too good to be true. It probably is. It is time to ask hard questions.
Kathleen O’Connor © January 2, 2016