The Democrats Will Change MedicareAdvantage

So, Now What?

Most observers don’t think the Democratic takeover will end up meaning a lot. It takes 60 votes do get anything done in the Senate, there is still a Republican presidential veto to contend with, and Democrats would be foolish to rollback the Republican tax cuts or repeal programs like the Part D Medicare drug benefit or the new private Medicare Advantage plans that now have millions of generally happy senior enrollees.

In fact, Goldman Sachs analyst Mat Borsch came out with a positive report on Humana, a company that has been particularly aggressive in the Medicare market. Borsch said that while it is possible Democrats would change the Part D program, “the odds of substantial change to the Medicare Advantage plan program (which is what really matters to Humana) are remote.”

Wrong.

Why Democrats Hate Medicare Advantage
Let’s review some of the history.

The profitability of MedicareAdvantage plans is what really matters not only to Humana but also to most major health players who have aggressively entered that business.

In fact, Humana’s government profit center reported that MedicareAdvantage enrollment grew to 993,000 from 489,000 a year earlier. Almost all of that growth was in the private fee-for-service product subset. Humana also reported a pre tax MedicareAdvantage profit of $207 million in the third quarter—up from $87.9 million in the same quarter of 2005.

Part D was always the thing the industry had to agree to in order to get the fantastic deal they have with MedicareAdvantage.

The Medicare Payment Advisory Commission recently said that private MedicareAdvantage plans get an average of 11% more for their seniors than the traditional Medicare plan gets for its enrollees. The Republican Congress did that intentionally in 2003 in order to attract private plans back into the private Medicare program after many either cut back or left it altogether in the wake of sharp cuts in the 1997 budget.

This “prime the pump” strategy made sense to Republicans who wanted to begin the reform of the traditional Medicare program by encouraging HMOs to bring market forces to bear on the exploding cost of the program.

But most Democrats hate the idea.

It gets down to a fundamental difference between the two parties. Republicans generally believe that a government-run plan and quality/efficiency are mutually exclusive and the value of market forces are at the core to any successful reform.

Democrats generally believe that Medicare has worked well and the market will only want to skim off the best risks and divide Medicare into two programs. They worry that the Republican “defined contribution” private market strategy will stratify Medicare enrollees by what they can afford to pay. Ultimately, they argue, the best quality plans will cost more and be affordable only by the well off. Those who won’t be able to afford premiums set by the market for the best plans will be forced to remain in what will become a second class Medicare plan, or plans that will look more like today’s Medicaid.

Many Democrats, and the House Democratic leaders in particular, believe that the universality of Medicare is absolutely critical. The logic is that you need to have the rich and powerful in the same pot as everyone else if you want to have equality in health care.

What many of these financial analysts on Wall Street don’t understand (Humana is trading at the highest price/earnings multiple in the HMO industry) is that, to the Democrats, this is not just about a fair funding level for private Medicare plans and whether they want to risk messing with them. It is about deep-seated ideological objections.

On top of all of this, just how Humana is making its extraordinary profits only compounds the Democrats’ ire. Almost all of Humana’s MedicareAdvantage growth this year has been in the Medicare fee-for-service product (MFFS). This is the product that does not allow insurers to negotiate lower provider reimbursement rates. To its critics, it is almost entirely an arbitrage play letting insurers take the 11% higher reimbursements, spend some of it on higher benefits for seniors to get them interested in the plans, and take the rest in profit. MFFS is hardly proof that the market can manage Medicare better than the government.

Industry logic that sees MFFS as a means to gradually transition seniors into more sophisticated products where insurers can apply medical management and provider negotiation hasn’t impressed the Democrats.

To a great many Democrats, and in particular their leadership, this is about throwing a wrench into the Republican vision of what Medicare will look like in the coming years—a vision that these Democrats see as a “Republican sell-out” of the longstanding Medicare entitlement promise and an “egregious example of taking care of their corporate friends.” They put Medicare fee-for-service right on top of their list.

To throw that wrench in the works, the Democrats don’t need to focus on a presidential veto threat or even worry about 60 votes in the U.S. Senate. They don’t even have to risk senior ire by outright trying to kill the new private Medicare plans.

They only have to look to Republican Newt Gingrich for their anti-market Medicare strategy. They just need to set it up to “whither on the vine.”

It’s the Budget, Stupid!
They can do that, rather easily as it turns out, in the budget process. A budget is not subject to the 60-vote rule in the Senate. A budget can be vetoed, but would Bush veto a gigantic budget bill over this issue? More likely he would compromise on the size of the cuts—not critical to a longer-term “wither on the vine” strategy.

The Democrats’ victory in the Senate turns out to be very important here. With just one slim vote, the Democrats now control the committees in both houses—and control any House/Senate conference on a budget.

Republicans used control of the conference structure to enable their leadership to dictate just what went on the table and which members got to be part of the conference. The minority party is almost always frozen out. Passing a bill in the House is one thing, passing a bill in the Senate is another, but controlling the conference, who gets to vote, and just what gets considered (even things that had not been passed in either house in the first place) is at a whole different level.

It is true that most of the new Democrats are moderate or even conservative Democrats on many issues. However, the budget is where MedicareAdvantage and Part D payment levels and benefits are decided and that process is one big black hole that will be controlled by the long-time liberal Democratic chairmen who just literally hate these programs. That’s where the likes of powerful Democrats John Dingell, the longtime Democratic Chair of the House Energy and Commerce Committee the last time around; Henry Waxman, who will have government operations oversight; Charlie Rangel who will lead Ways and Means; Pete Stark, who will head-up the Ways and Means Health Subcommittee; and Ted Kennedy, who will again chair the Senate Health, Education, Labor, and Pensions Committee, will control the agenda.

And, don’t forget oversight. These Chairmen will have the ability to nitpick these programs to death with their influence over the regulation of these plans and things like benefit schedules.

The only friendly Democrat the health plan industry has to talk to is the incoming Senate Finance Chair Max Baucus (D-MT). He worked closely with his friend, outgoing Senate Finance Chair Chuck Grassley (R-IA), to pass the 2003 Medicare bill in the first place and has defended it ever since.

Sure President Bush would veto any bill that did away with Part D, or MedicareAdvantage, or cut their financing.

But there won’t be such a standalone bill.

There will be some giant spending bill that will have lots of gives and takes in it. Maybe, Bush would risk a veto of the whole thing if it cut MedicareAdvantage plans by that 11%. But would he risk a veto of a big budget bill if it cut the HMOs by 5% and upped the benefit schedule in Part D and MedicareAdvantage? Not likely.

Not only do Democrats want to cut the private Medicare funds because they don’t like them, they need to cut them to find money to do other things.

One thing that is certain about Congress—Democrat or Republican—is that when it needs money it always comes looking to take some from the Medicare providers. How many times have we seen Republicans and Democrats cut doctors and hospitals to balance the budget—especially when either was seen as well compensated?

Now, HMOs are Medicare providers too and they are seen as fat with lots of great reimbursement. Just listen to Humana’s CEO talking about his profits tripling in the third quarter, “This quarter’s biggest takeaway is that our Medicare strategy is working.” That sounds great in the investment community but he’s asking for trouble in Washington.

It may get even more problematic for the HMOs in a way I wouldn’t have predicted just a few weeks ago. The current Congress has not completed its 2007 budget for the Medicare program. There is talk that Republicans may not even try to finish it and instead punt it to the new Congress. That means that instead of Democrats getting their first Medicare budget in late 2007, they may get their first whack at the HMO Medicare payments in January!

The HMO Medicare business is seen as highly profitable just as doctors are in a bind. Because of the Medicare Sustainable Growth Rate Formula, Medicare physicians are scheduled for a 5% fee cut on January 1, 2006. They are scheduled for a total of 40% in cuts over the next five years. Democrats, like Republicans, want to help the doctors out, and they need a place to get the money.

Beyond that, there is a $3 billion shortfall that has been identified to pay for the Labor/HHS spending bill the 2006 Republican House passed. There is a $5.5 billion gap on all unfinished appropriations bills.

Then there is the cost of fixing the Medicare physician fee cuts. Before the Congress adjourned this month, they took $7 billion from the MedicareAdvantage stabilization fund and used it to offset scheduled Medicare physician fee cuts.

The Democrats made lots of other election promises that cost money and those profitable HMOs present one terrific target.

The good news for the health plan industry is that it’s making loads of money in the MedicareAdvantage business.

The bad news for the health plan industry is that the timing for a Democratic return to power couldn’t be worse for them.

The first budget target was the MedicareAdvantage stabilization fund—originally budgeted to be $10 billion. Since it hasn’t been necessary to stabilize anything so far, that is easy money for the industry to give back.

With $7 billion of that already gone (and it was the Republicans that gave that back!), any more givebacks are going to be real money.