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Medicare May Spend $60 Billion on Private U.S. Health Plans
Bloomberg News Service
August 23, 2005
Medicare may spend $60 billion, about 30 percent more than White House estimates, encouraging private health plans to provide benefits for seniors in the next decade, according to an analysis in the journal Health Affairs.
Co-author Steven Pizer, a health economist at the Department of Veterans Affairs in Boston and an assistant professor at Boston University, said the unexpected costs may eventually cause Congress to cut the subsidies. The analysis was published on the journal's Web site today.
``The government has a history of being a bad business partner, and that's why they have to put so much money on the table,'' Pizer said in an Aug. 19 telephone interview. ``That, in turn, increases the odds that it will be a bad business partner in the future.''
Private health plans such as Aetna Inc. and PacifiCare Health Systems Inc. will receive increased subsidies starting next year under a 2003 law. The measure was designed to generate more choices for the 42 million disabled and elderly Americans covered by the government's Medicare program. Currently, most Medicare patients are in a single, government-run plan.
Last year, the Congressional Budget Office estimated the subsidies would cost about $14 billion over a decade, and the White House budget office predicted $46 billion. Medicare will spend about $332.3 billion on benefits this year. New coverage for prescription drugs will add $60 billion to costs next year.
`Wildly Premature'
Karen Ignagni, president of industry group America's Health Insurance Plans, said it was ``wildly premature'' to do an analysis of the program before the government approves health plans' bids and signs contracts.
``It's going to take time to see how the program plays out, and which plans seniors will choose,'' Ignagni said in a telephone interview yesterday.
Pizer said the two government estimates didn't take into account that Medicare may have to pay higher subsidies to companies with preferred-provider organizations, or PPOs, than they pay health-maintenance organizations, or HMOs.
HMOs tend to serve populated areas in and around cities and can extract deeper discounts from health-care providers by limiting networks to certain hospitals and doctors. That means HMOs will have a competitive advantage because they can focus only on certain markets, the analysis concluded.
PPOs are required to serve regions that include one or more states because Congress wanted patients in rural areas to have access to Medicare managed-care plans. As a result, the government will need to pay PPO plans more to keep them in the program, according to the analysis.
``Our findings indicate that regional PPOs will avoid competing with HMOs, focusing instead on underserved areas that will be profitable only because of overpayments,'' Pizer said.
Pizer and his co-authors, University of Minnesota Professor Roger Feldman and researcher Austin Frakt at the Veterans Affairs hospital in Boston, said PPOs will enter only eleven of 26 U.S. regions because that is where they can make a profit. Those regions include New York, Florida, Michigan, Arizona, Nevada and California.
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