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Obama administration intervenes to give $71.5 billion to overpaid, for-profit Medicare Advantage plans

Physicians group decries ‘backroom Medicare giveaway’

FOR IMMEDIATE RELEASE, April 9, 2013

Contact: Mark Almberg, (312) 782-6006, mark@pnhp.org

Medicare’s costs will jump by $7.43 billion next year – the equivalent of $149 for each of the nearly 50 million beneficiaries in the program – due to an unprecedented intervention last week by the Obama administration in the way privately run, for-profit Medicare Advantage (MA) plans, which are also known as Medicare HMOs, are paid by the government, a national physicians group reported today.

The total cost to U.S. taxpayers will be $71.5 billion to $104.5 billion over the next decade, depending on the number of Medicare beneficiaries who enroll in the private plans, researchers at Physicians for a National Health Program said. That’s money that could keep traditional Medicare’s hospital trust fund safely in the black over the same period, eliminating any need for greater cost-sharing by beneficiaries, they said.

Enrollment in MA plans, currently at 13.1 million beneficiaries, was expected to dip sharply over the next few years in the wake of a reduction in government overpayments to the plans under the Affordable Care Act (ACA), but the researchers said enrollment may not decrease, due to this windfall and last year’s “quality bonus” payments: hence the variation in the estimated cost.

“Medicare Advantage plans have been overpaid by the federal government for years, wasting tens of billions of taxpayer dollars,” said Dr. David Himmelstein, professor at the City University of New York School of Public Health and co-founder of the physicians group. “Studies by the Government Accountability Office, MedPAC and many private groups have drawn attention to this overpayment. The Obama administration’s ACA acknowledged the overpayments by calling for cuts to these payments starting in 2014.

“But last week’s extraordinary rate-setting directive from Health and Human Services Secretary Kathleen Sebelius to the Centers for Medicare and Medicaid Services, in which she spurned historical practice and the advice of the CMS Office of the Actuary, will result in an obscene windfall to the private, for-profit insurers,” he said. “Simultaneously, this backroom Medicare giveaway is a heavy blow to taxpayers and the traditional, public Medicare program.”

In response to the CMS announcement, which was leaked shortly before 4 p.m. last Monday, stock prices for the nation’s five largest for-profit health insurers surged last week, yielding a $13.2 billion bonanza for investors. Stock prices increased from open of trading Monday, April 1, to close of trading Friday, April 5, by the following amounts: Cigna, $15.93; Humana, $8.93; UnitedHealth Group, $4.94; Aetna, $4.62; and WellPoint, $1.70. Aetna’s Coventry share prices jumped by $1.19.

UnitedHealth and Humana reaped the largest windfalls. (See Table 1.) Based on its share of the MA market (20 percent, including its purchase of XL Health Corp.), UnitedHealth will receive an extra $1.49 billion from Medicare for its Medicare Advantage plans in 2014, and $14.3 billion to $20.9 billion over the next decade, triggering a $5.04 billion surge in the value of UnitedHealth's stock last week.

Humana (17 percent market share) will receive an extra $1.26 billion from Medicare for its Medicare Advantage plans in 2014, and $12.2 billion to $17.8 billion over the next decade. Humana's stock surged $1.41 billion last week.

Other insurers will also reap huge rewards. WellPoint (4 percent market share) will receive an extra $297 million in payments from Medicare for its Medicare Advantage plans in 2014, and between $2.86 billion and $4.18 billion over the next decade. Former CEO Angela Braly received compensation and stock options of $20.6 million in 2012.

Aetna will receive at least an extra $223 million from Medicare for its Medicare Advantage plans in 2014 (excluding its 75 newly acquired Coventry plans), and $2.14 billion to $3.14 billion over the next decade. Coventry will receive extra payments of $149 million in 2014 and between $1.43 billion and $2.09 billion between 2014 and 2022.

Finally, Cigna, which almost entirely exited the MA market in 2010, re-entered the market with the purchase of HealthSpring’s 40-plus plans in 2011. Cigna will garner an additional $223 million in federal payments in 2014 and between $2.14 billion and $3.14 billion over the next decade as a result of the Obama administration’s action.

Dr. Ida Hellander, director of policy and programs at PNHP, said that in 2012 alone, privately run Medicare Advantage plans were overpaid $34.1 billion, or $2,526 per enrollee. She and Himmelstein were among the authors of a study last year showing that having Medicare Advantage plans compete with traditional Medicare does not save money, but costs taxpayers billions of dollars more each year.

For the present analysis, Hellander and Himmelstein used publicly available data from the New York Stock Exchange and Medicare’s Board of Trustees to calculate the impact of a 5.5 percent hike in Medicare Advantage payments on insurers' stock valuation and future government spending.

Hellander said, “Medicare Advantage plans are siphoning off valuable health care dollars into private, for-profit hands and producing no better outcomes to show for it. It is time to stop putting profits over patient care and adopt an improved Medicare for All, a national single-payer system. Single payer would save enough on wasteful private insurance-related bureaucracy and profits to provide high-quality care for everyone.”

Dr. Andrew Coates, president of PNHP and an internist in upstate New York, commented on the findings. “Instead of making a cut to the overpayments, the administration has bent over backwards to take good care of the private Medicare Advantage insurers,” he said. “This behind-the-scenes maneuvering will not only swell the already unconscionable profits of the insurance companies, but will further impair the traditional, public Medicare program.”

Table 1.


Sources

Kaiser Family Foundation Medicare Advantage Enrollment Update 2013; Google Finance April 1 to April 5, 2013; Medicare Trustees Report 2012; Washington Post, April 2, 2013; 10-year total based on 2013-2022 total Medicare spending of $1.3 to $1.9 trillion on MA plans.

Notes

1. As a result of HHS Secretary Sebelius’ unprecedented intervention, and over the objection of the Actuary, MA spending in 2014 will increase 5.5 percent. Instead of a 2.2 percent reduction in payments as announced in February 2013, there will now be a 3.3 percent increase. MA spending for 2014 after the passage of the ACA but before the intervention was an estimated $135.2 billion; $67.1 billion on Part A and $68.1 billion on Part B. A 5.5 percent increase amounts to $7.43 billion in 2014.

2. As a result of $156 billion in MA cuts included in the ACA, the Medicare Trustees’ latest report (2012, Table IV, c1) projected an MA enrollment decline from 26.7 percent of beneficiaries in 2012 to a low of 16.2 percent of beneficiaries in 2018, resulting in MA spending of about $1.3 trillion between 2013 and 2022. But enrollment may not fall that much, and could increase, especially if the Obama administration keeps backpedaling on its commitment to stop the overpayments to Medicare Advantage plans (e.g. with over $8 billion in offsetting “quality” bonuses and now an unprecedented intervention into payment rate-setting).  As a result, MA payments over the next decade could rise one-third or more, topping $1.9 trillion. A 5.5 percent increase on estimated MA spending of $1.3 trillion to $1.9 trillion equals $71.5 billion to $104.5 billion.

3. The estimate of $156 billion in MA cuts in the ACA is from the Congressional Budget Office’s letter of July 24, 2012, Table 2. www.cbo.gov/publication/43471

4. Historical stock prices and number of shares are from Google Finance accessed April 7, 2013.

5.  Market-share data is from the Kaiser Family Foundation’s Medicare Advantage Data Spotlight: Enrollment Update (2013), www.kff.org/medicare/upload/8323.pdf. Market share for Aetna’s Coventry, UnitedHealth’s XL Health Corp., and Cigna’s HealthSpring is based on enrollment at the time of acquisition.

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Physicians for a National Health Program (www.pnhp.org) is a research and education organization of more than 18,000 doctors who advocate for single-payer national health insurance. To speak with a physician/spokesperson in your area, visit www.pnhp.org/stateactions or call (312) 622-0996.