How Humana and other insurance companies rigged the Medicare prescription
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
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
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
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
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