V I E W P O I N T

The Privatization of Medicare

Medicare is the federal health insurance program that provides coverage to 43 million Americans who are age 65 and older, or who are younger than 65 and receiving Social Security disability payments.  Traditional Medicare consists of hospital insurance, Part A, and supplementary medical insurance, Part B.  Every Medicare beneficiary has the same cost-sharing amounts, and benefit structure, under both Parts A and B. Premiums were originally uniform, but are now increased for higher-income beneficiaries.

The Medicare Part D prescription drug benefit, established by the Medicare Modernization Act of 2003 (MMA), differs dramatically from traditional Medicare.  The MMA allows only private companies to participate in Medicare Part D, thus privatizing prescription drug coverage for America 's seniors and eroding the social insurance nature of the Medicare program.  Because of this privatized structure, beneficiaries pay different premiums, and must choose between plans with a variety of drugs covered and cost sharing amounts.

Despite the success and popularity of the traditional fee-for-service Medicare program, and the failure of past privatization efforts such as Medicare+Choice, the MMA greatly expanded the role of the private sector in Medicare.  In addition to the prescription drug benefit that is delivered only by private stand-alone prescription drug plans or private Medicare Advantage plans, the law threatens traditional Medicare by providing financial incentives for private health insurance companies and by calling for a “premium support” demonstration to compare costs between fee-for-service Medicare and private plans.

NATIONAL COMMITTEE POSITION

Seniors should have the option of a Medicare prescription drug benefit rather than having to sort through countless private plans in order to receive prescription drug coverage.   Seniors face too many plan choices with various premiums, deductibles and other cost-sharing amounts.  A government-operated prescription drug benefit could provide a more comprehensive formulary at uniform prices.  Furthermore, unlike private companies, a government plan would not need to increase prices and change formularies throughout the year to maximize profits. 

Private insurance companies should not be favored over seniors.  The MMA dramatically increases incentives for private health insurers to compete with traditional Medicare.  Medicare Advantage (MA) plans are paid 113 percent of the amount traditional fee-for-service Medicare spends per beneficiary.  Medicare will also able to draw on a “stabilization” fund to promote participation in regional preferred provider organizations (PPO).  T he stabilization fund will receive an initial federal payment of $3.5 billion that can be used for PPO payments from January 2012 thru December 2013.   These subsidies provide an unfair competitive advantage to private insurance plans over traditional fee-for-service Medicare.  A better use of the money would be to improve the Part D benefit by reducing costs to seniors, including filling-in the so-called “donut hole” in the prescription drug benefit that requires beneficiaries to pay 100% of the cost of their prescription drugs while continuing to pay full premiums to private plans.

Unlike traditional Medicare, private plans do not deliver guaranteed benefits.  Seniors are attracted to private Medicare Advantage plans because they offer enhanced benefits using the overpayments from the government, as well as to avoid the confusion of picking separate prescription drug and Medigap policies to supplement traditional Medicare.  Unfortunately, private plan enrollees lose the assurance of Medicare's benefits, price and continuity, as well as their long-time health care providers if they do not participate in the private plan's network.  We have learned from past experience with the Medicare+Choice program that private plans increase costs to beneficiaries or drop out of the program altogether when their financial status or the amount of the government subsidy changes.

Privatization increases Medicare costs and accelerates Medicare's solvency issues in addition to increasing costs to beneficiaries.  The Congressional Budget Office projected that increases in payments to private Medicare Advantage plans under the MMA would cost $14 billion over the first decade, while the Medicare Actuary estimated that these overpayments would total $46 billion.  The 2004 Medicare Trustees report projects that the Trust Funds have lost two full years of solvency due in large part to the extra costs of the prescription drug benefit and the overpayments to private plans.   In addition, all beneficiaries, regardless of whether or not they enroll in a Medicare Advantage plan, subsidize payments to private plans by paying higher Part B premiums.

The “premium support” demonstration provision in the MMA would further move Medicare beneficiaries out of traditional Medicare and into private health plans.  The “comparative cost adjustment demonstration project”, also known as “premium support”, will require traditional fee-for-service Medicare to compete, based on cost, with subsidized private plans in offering Medicare's standard benefits package beginning in 2010.  Proponents of the project claim that injection of competition between private providers will result in better benefits to seniors at lower cost.  But it is clear that private companies cannot match Medicare for its low administrative costs and efficiency. 

This project will also convert Medicare's Part B program into one that more closely resembles the new Part D drug benefit.  The guaranteed, consistent and comprehensible benefit seniors count on today will become a collection of private plans with varying benefits and costs.  Medicare's Actuaries have projected dramatic differences in premiums based on geography, with wide differences in costs even for seniors living in neighboring counties.  Seniors selecting this option will be required to give up their traditional fee-for-service coverage and go into managed care instead.  Healthier seniors may do better in such a system for a time, but older, sicker seniors are more likely to remain in traditional Medicare.  This leaves them with fewer choices and higher costs, and over time erodes the social insurance nature of Medicare. 

The National Committee opposes the President Bush's proposals to provide Health Savings Accounts to Medicare beneficiaries.  The MMA created Health Savings Accounts (HSAs) for individuals not eligible for Medicare.  HSAs are private accounts used by individuals who have a high-deductible health policy to save money to pay for out-of-pocket health care expenses.  This year, the Administration proposed to consider health plans HSA-eligible if they meet all of the current requirements of a high-deductible plan health plans (HDHP), provide at least a 50 percent coinsurance requirement and a minimum out-of-pocket cost equal to or lower than a HDHP premium.  The President's latest budget proposal is yet another way to steer Medicare toward private insurance, making each individual beneficiary a risk pool of one.  Health savings accounts would likely attract healthier and wealthier seniors, again leaving older and sicker seniors in a more expensive risk pool.  

CONCLUSION

Forty years after its enactment, Medicare, along with Social Security, remain our most popular and essential federal social insurance programs.  Any changes in Medicare must not alter the fundamental social insurance principle that has made Medicare such a popular and effective program. 

The National Committee to Preserve Social Security and Medicare will continue to advocate for expanding traditional fee-for-service Medicare to include a prescription drug benefit with the government negotiating drug prices.  The National Committee is also dedicated to leveling the playing field between traditional fee-for-service Medicare and private Medicare Advantage plans in order to enhance benefits for all Medicare beneficiaries and to make the best use of all Medicare expenditures.  In addition, the National Committee will continue to oppose initiatives such as the “premium support demonstration” and Medicare health savings accounts that likely would result in a two-tiered Medicare program based on income and health status.

Government Relations and Policy, February 2008