Medicare Rx Insurers’ Suspicious Practice

Private Part D Payors Get $9B Windfall, and Watchdogs Cry Foul

DOWNERS GROVE, Ill., Feb. 27, 2019 — Well-known health insurance companies earned $9 billion extra from Medicare over the past 10 years by inflating their cost projections under Medicare’s Part D prescription coverage. That’s the essence of The Wall Street Journal report published in early January.

Every year the companies of Medicare Advantage, which include CVS Health, Humana, and United Health Group, send estimates to Medicare. They estimate what their costs of providing drug coverage will be for the following 12 months. Then, Medicare pays them monthly based on that. After the year passes, Medicare reconciles the difference.

Let Me Explain

A quirk in Medicare’s rules provides an incentive for these companies to fudge their estimates.

The rule says that Medicare will cover some of the private companies’ financial losses when covering high-risk and standard beneficiaries.

If the insurance companies overestimate the cost of covering high-risk members, they lose revenue, and if they underestimate the cost of covering standard-risk members, they lose money. Conversely, if Medicare Advantage insurers overestimate the cost of covering standard-risk beneficiaries, they get to keep up to 5 percent of the difference, and possibly more.

Oh Really

The companies are blaming actuarial errors and the volatile prices of drug companies for the discrepancies.

However, industry analysts push back on those explanations, saying that it’s incredibly rare for an insurer to make a good-faith actuarial error. Kaiser Family Foundation, which translates Medicare policy for the public, places those odds at one in a million. (By comparison, a person has a better chance of being struck by lightning.) Furthermore, the consistency of the over- and underestimates over so many years raises red flags.

Looking Forward (and Backward)

Will taxpayer money continue to be used to cover these costs that have analysts crying foul? History and cost trends say, “Yes.”

Taxpayer money in the form of payroll taxes contribute the lion’s share of revenues to the Medicare trust. Since 2007, costs to the trust of privately managed Medicare have steadily grown. To wit, between 2007 and 2017:

  •  Spending on privately managed Parts A and B (Medicare Advantage) increased 169 percent
  • Spending on traditional Medicare Parts A and B increased 31 percent
  • As a percentage of total Medicare spending, Medicare Advantage increased from 18 percent to 30 percent
  • As a percentage of total Medicare spending, traditional Medicare decreased from 70 percent to 56 percent
  • Spending doubled on Medicare Part D, which is more often part of Medicare Advantage plans than stand-alone plans

Source: Kaiser Family Foundation

Furthermore, concerns over fraud and cost overruns in all “parts” of Medicare have existed for decades. The quirk in Medicare Advantage Part D rules—the one that allowed the companies to net $9 billion in extra revenue over 10 years—was identified as early as 2015. In that year alone, The Wall Street Journal identified an aggregate overestimate of $2.2 billion. Out of that, the companies got to keep $1.1 billion.