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Covering Medicare Prescription Drugs by HMOs and Insurance Companies Would Be Unreliable and Costly, Study Shows

Sept. 26, 2002

Covering Medicare Prescription Drugs by HMOs and Insurance Companies Would Be Unreliable and Costly, Study Shows

WASHINGTON, D.C. – Proposals relying on private sector plans to offer prescription drug coverage to Medicare beneficiaries would be vastly inferior to a drug benefit offered directly by Medicare, according to a report released today by Public Citizen. The report examines authoritative government and private sector research on the Medicare program’s current experience with private sector plans and finds that coverage offered through private insurers would be unreliable, inefficient and confusing to beneficiaries, and that private plans would not be able to negotiate the steep drug price discounts that would be achievable if Medicare offered the benefit directly.

The report documents that Medicare’s experiment with relying on HMOs to offer coverage for doctor and hospital care has been a failure, and it shows that private plans should not be relied upon to offer prescription drug coverage. Since 1999, HMOs have dropped 2.2 million beneficiaries, forcing them to find new health care providers. In 2003, an additional 200,000 beneficiaries will be dropped by their plans. Plans have left the program despite the fact that, according to government reports, they are overpaid for the care they must provide to beneficiaries.

The report also found that HMOs offering prescription drug coverage have significantly increased the additional premium they charge beneficiaries. In 14 states where private drug coverage was provided through HMOs in both 1999 and 2002, the average premium increased more than 100 percent during that time. In eight states, it increased more than 300 percent.

“The findings in this report show that the real-world experiment with forms of Medicare privatization has been a flop,” said Frank Clemente, director of Public Citizen’s Congress Watch. “It would be a disaster for America’s seniors and people with disabilities to expand this experiment by giving HMOs and private insurers wholesale control of prescription drug coverage.”

U.S. Sen. Debbie Stabenow (D-Mich.), leader of the Senate’s Prescription Drug Task Force, joined Public Citizen in highlighting the report’s findings.

“Despite their claims to provide coverage for seniors, coverage under private sector drug plans would be unreliable, inefficient and confusing to beneficiaries,” Stabenow said. “These plans would not offer

the same deep discounts as a Medicare-based plan, and they would in general be vastly inferior to a prescription drug benefit offered under Medicare.”

Among the report’s other major findings:

  • The 10 states with the highest number of Medicare+Choice enrollees dropped from their plans since 1999, including figures announced this week for 2003, are: Texas : 313,767, Florida: 264,170,California: 184,578, New York: 179,941, Pennsylvania: 154,519, Ohio: 144,400, Maryland: 116,273, Connecticut: 110,783, Washington: 85,265, New Jersey: 79,733.
  • HMOs offer unreliable coverage. Nationwide, the number of states in which HMO Medicare drug coverage was unavailable jumped 56 percent, from a total of 9 to 14.
  • For-profit insurers are particularly unreliable. Private HMO plans that are for-profit, as opposed to non-profit, and owned by a large national corporation, as opposed to locally owned, are two-and-a-half times more likely to withdraw from serving Medicare beneficiaries.
  • HMOs are overpaid but demand still higher payments for providing coverage. HMOs are withdrawing from the Medicare program despite the fact they are overpaid, according to government investigators. From 1998 to 2000, federal payments to Medicare HMOs exceeded by 13.2 percent the costs the program would have incurred for paying to treat patients. In one year, 1998, Medicare HMOs were overpaid $5.2 billion.
  • HMOs are not viable in much of the country, particularly rural areas. In 2002, only 61 percent of beneficiaries had access to enrollment in an HMO. This represents a significant decline from 1998, when 74 percent of beneficiaries had access to an HMO.
  • HMOs and private insurers are far less efficient than the Medicare program. The Medicare program spends a mere 2 percent on administrative costs. By contrast, HMOs on average spend 15 percent of their revenue on administrative costs, rather than on health care. Some HMOs spend as much as 32 percent of their revenue on administration. Private insurers that now offer supplemental insurance to Medicare enrollees (Medigap policies) spend an average of more than 20 cents of each premium dollar on agents’ fees, marketing, advertising, administration and profits – not on health care.
  • Private insurers don’t have the clout to negotiate drug price discounts that are as deep as those the federal government gets. For example, today, the federal government’s Veterans and Defense departments negotiate price cuts of 52 percent off the price paid at the pharmacy. HMOs and other private sector purchasers negotiate discounts of only 12 to 40 percent.
  • Health problems among seniors make proposals relying on choice unworkable. Nearly a quarter (23 percent) of Medicare beneficiaries have health or cognitive problems (e.g., poor hearing or eyesight). One national survey found that 44 percent of adults over the age of 60 are functionally illiterate.

“What is so astonishing is that some members of Congress insist on pursuing a private sector approach to drug coverage even in light of clear evidence that the private sector has failed to offer reliable coverage for doctor and hospital care,” said Ben Peck, legislative representative with Public Citizen’s Congress Watch.

Click here to view the report online.