Managed Care Matters

It will come as no surprise that the war over the Medicare Part D program (free subscription required) is continuing to heat up, with Republicans touting the benefits for seniors while Democrats describe the program as a giveaway to the large pharmaceutical firms on the backs of the taxpayers.

As I have noted before, the entire Medicare Part D program, from the original budget estimates (remember the Medicare Chief Actuary was threatened with dismissal by the Administration (subscription required) if he revealed the true cost of the program before the Congressional vote) to the hold-harmless provisions protecting private companies from losses to the failure of the legislation to allow the Feds to negotiate drug prices to the cumbersome, complex, confusing program itself to the likelihood for adverse selection due to the benefit design is enough to make your head spin. And that's exactly what is happening amongst potential beneficiaries.

An article in the New York Times on Part D describes the problems politicians of all stripes are facing when attempting to educate their constituents about this program…Here are a few excerpts from the NYT article followed by my comments.

"The Medicare drug plan was devised to reflect central Republican tenets: that private companies, and private market forces, are the best way to deliver drug benefits to the nation's elderly; that the government's role should be sharply limited, particularly when it comes to exerting price pressure on the drug companies; and that the nation's retirees ought to have a full array of options for their drug coverage.

Comment - It is somewhat strange that our elected representatives find it necessary to spend their time talking to people to educate them about a social service program, especially when the program itself is supposed to be run by the private sector, thereby benefiting from the private sector's inherent capabilities in marketing.

Nevertheless, that's what's happening.

Some are arguing that the very number of health plans participating indicates the program is a success.

"In fact, Medicare beneficiaries have many more choices than officials had expected. In Kentucky and Illinois, for example, they can choose from 42 free-standing prescription drug plans, with different premiums, deductibles, co-payments and lists of covered drugs. Many recipients say they simply feel overwhelmed.

"So many choices!" said Virginia R. Potempa, 80, after a Medicare forum held last week by Representative Judy Biggert, a Republican, in Bolingbrook, Ill., outside Chicago. "The government seems to think everybody works a computer. Well, we do not."

Comment - while it is clear that many private-sector firms are very interested in Medicare Part D, they would not be unless they were quite comfortable that their potential losses were minimal and profits not. Remember the people deciding to enter the market are likely veterans of the Medicare + Choice and Medicare Advantage programs; previous (and ongoing) managed care approaches that burned some companies and benefited others. The senior management at private companies is obviously expecting to do well financially from the program.

"Still, Mrs. Potempa, who spends $300 a month for six prescription drugs, said she intended to enroll in the plan. "We are very concerned," she said. "We need coverage. We need insurance."

Comment - And Mrs. Potempa is right - and therein lies the problem for taxpayers in the Medicare Part D program. Only those beneficiaries who will benefit financially will sign up; that means their present and near-term costs are higher than they would be under a Part D program. The result - adverse selection - an insurance program that is built to attract people who are likely to claim more in benefits then they will pay in premiums.

So, the plan providers benefit, and the beneficiaries profit, and the politicians are making hay. Who loses?

Taxpayers who will have to foot the bill.

Here's a quick summary of the potential financial impact of the program from California HealthLine.

"total expenditures for the prescription drug benefit will reach $1.2 trillion between 2006 and 2015.

However, according to (presidential spokesman) McClellan, that figure reflects "gross costs" and does not take into account income Medicare will collect during that period (Pear, New York Times, 2/9). He said that the amount does not account for premiums paid by beneficiaries or payments from states for beneficiaries dually eligible for Medicare and Medicaid.

McClellan also said the Bush administration anticipates saving about $190 billion by eliminating federal matching payments to states for dual-eligibles who will begin to receive their prescription drug coverage through Medicare (Lueck, Wall Street Journal, 2/9). Together, the savings will reduce the net costs of the prescription drug benefit to $720 billion, McClellan said (Washington Post, 2/9). "

As a post script, I find it nothing short of bizarre that Republicans find themselves defending a major national social insurance program while Democrats decry it.

What does this mean for you?

The focus on Part D will mean private health plans' efforts to develop and market new programs and products will be concentrated on this market. Yes, there will continue to be resources focused on consumer directed plans, but don't expect many other programs to emerge for some time.