Industry Using Its Leverage in Medicare Debate

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Industry Using Its Leverage in Medicare Debate

By Vicki Kemper

Los Angeles Times, July 9, 2003

WASHINGTON - Once a week, "product people" from some of the nation's largest insurance companies meet by telephone to discuss how to design private health plans that could turn a profit while covering America's oldest, sickest citizens.

Obscure and highly technical, these behind-the-scenes meetings of insurance actuaries and executives are crucial to the high-profile, intensely political efforts of House and Senate lawmakers to forge a compromise between competing Medicare reform bills.

Reaching agreement on how to add a prescription drug benefit to Medicare while making the 38-year-old program operate more like the private insurance industry is just one of the challenges lawmakers face.

They also must design a plan that will work. And that means getting the participation of health-insurance companies, managed-care plans and drug-benefit managers.

And that in turn gives the industry tremendous leverage. At this critical stage in the negotiating process, many private companies appear to be holding out for any number of changes in a final Medicare reform bill.

"The government is tough to deal with," said Dr. Donald A. Young, president of the Health Insurance Assn. of America, the 300-member trade group whose Medicare reform task force is holding the weekly teleconferences. "We have to know what the rules are [before] going in."

Whatever the precise rules, the game will consist of giving the elderly a choice between traditional fee-for-service Medicare, with the added option of prescription drug coverage, and private health plans that offer a range of benefits through preferred-provider and health maintenance organizations.

The fundamental question facing House and Senate conferees is one of balance: How much should the reform plan be tilted toward the private sector?

The Bush administration and most Republican lawmakers support changes that would eventually require seniors and disabled people to shop for private Medicare coverage much as they choose home or auto insurance. Such changes are needed to control Medicare spending and keep the program alive for future generations, they say.

Some Democrats warn that privatizing Medicare would leave the elderly and disabled with benefits too paltry to purchase insurance in the private market. Thus it would undercut the government's long-standing commitment to provide health care for these groups.

Thirty-seven Senate Democrats sent a letter to President Bush on Tuesday outlining what, for them, are nonnegotiable issues. Sen. Edward M. Kennedy of Massachusetts, Senate Minority Leader Tom Daschle of South Dakota and other Democrats said they would oppose a final bill if it made premiums in traditional Medicare so expensive that most seniors would be forced into private plans.

They demanded a system that controlled drug prices, offered a government-sponsored drug benefit and provided special help for low-income seniors. And they promised to oppose legislation that encouraged employers to drop health coverage for retirees or that included tax-free health savings accounts.

For private industry, however, the key issues are largely about the bottom line. Insurers want ''the confidence going in that you're not going to lose your shirt,'' Young said. So they want the government to share more of their financial risk.

And the insurers will demand far more flexibility than they would get from the House and Senate bills, which limit the number of plans that can compete in a region and spell out complicated formulas for determining the value and pricing of private Medicare policies.

"We can't live with that kind of regulation," Young said.

Meanwhile, the industry that manages prescription drug benefits is trying to determine whether offering stand-alone drug coverage to seniors makes business sense.

"It would be premature to say yes or no at this point," said a representative of so-called PBMs, or pharmacy benefit managers. "We think there's an opportunity here, but we just need to look at the details."

Despite the health industry's reservations, several executives, health-care advocates and analysts said last week that they were confident Congress would produce a final bill acceptable to the private sector.

But Bruce Vladek, who ran the Medicare program under President Clinton, warned against letting the private insurance plans dictate the terms.

"We've had private plans coming into Medicare since the 1970s," he said. "When you overpay them, they come in. When you underpay them, they leave."

Almost lost in last week's discussions was what remains the primary policy goal of many seniors and Democratic lawmakers: the creation of a Medicare prescription drug benefit.

While the Congressional Budget Office estimates that prescription drug expenses for Medicare beneficiaries will total $1.8 trillion over the next 10 years, both the House and Senate bills provide just $400 billion.

"That's just a little over 20 cents on the dollar," said John Rother, director of policy and strategy at the 35-million-member seniors' group AARP. "For many people, that's a shock. They were anticipating something much more adequate."

One of the bigger questions about the workability of the Medicare reform plans concerns the delivery of prescription drug benefits to seniors who choose to stay in traditional Medicare.

At the middle of last week, insurance executives and others close to the Medicare negotiations were saying they had not heard of a single company interested in offering a drug-only plan to those beneficiaries.

Apparently no one had talked to Howard G. Phanstiel, president and chief executive of California-based PacifiCare Health Systems. "We're very interested in participating in the stand-alone drug plan," Phanstiel said in an interview. "Our business model is very well-suited to this kind of program."

But what if other companies chose not to offer such plans?

Under the Senate bill, if beneficiaries did not have at least two private stand-alone drug plans from which to choose, the government would provide the benefit.

The House bill has no such provision, meaning that seniors wanting prescription drug coverage would be forced into the private sector to obtain coverage from either a stand-alone drug policy, or a PPO or HMO.

For seniors' advocates and some Democrats, a final bill that does not include a fallback provision would be unacceptable. "It's critically important that there be a government fallback," said AARP's Rother.

But perhaps the No. 1 potential deal-breaker is a House provision that everyone agrees could fundamentally change the nature of the Medicare program.

Under the traditional system, the government reimburses hospitals, doctors and other health-care providers for the services they provide to Medicare beneficiaries.

Under the House-proposed "premium support" system, the government would instead contribute a set amount toward each beneficiary's health coverage. Seniors and disabled persons would then buy the best policy they could afford — and pay the difference (or pocket the savings) between the premiums and the government contribution. Starting in 2010, traditional Medicare would compete against private plans, a process that actuaries have said could increase traditional Medicare premiums by up to 25%.

Republicans say premium support is vital to their efforts to control Medicare spending, as the number of beneficiaries is expected to balloon from 40 million this year to more than 70 million by 2030.