THE BLOG
07/30/2008 05:12 am ET | Updated May 25, 2011

The Overturned Medicare Veto: A Good First Step Toward Resolving The Problems Of Privatization

Last week's action by Congress to override President Bush's veto of the Medicare Improvements for Patients and Providers Act (HR 6331) was a landmark step toward reversing the tide of privatization of Medicare over the last three decades. The votes in Congress were a resounding defeat for conservative policies and the lobbying efforts of the insurance industry. There was no ambiguity in the override votes -- 383 to 41 in the House and 70 to 26 in the Senate, with 153 Republicans in the House and 21 Republicans in the Senate defying the president. The courageous leadership of Senator Edward Kennedy, long a champion of better access to health care, helped to head off a disastrous veto of this legislation despite his current medical problems.

The major reason given for the presidential veto was the bill's cuts of overpayments to private Medicare plans and the alleged "decreased choice available to seniors." Conservative policy makers were unrelenting in their reaction to the override. Mike Leavitt, HHS Secretary, opined in the Washington Times that "Democrats in Congress have loaded this bill with provisions that undermine choice and, worse, pave the way to still more government control of Americans' personal health care decisions."

The bill cancels the 10.6 percent cut in physician reimbursement which would have taken place, instead providing a 1.1 percent increase. The bill's provisions will cost about $20 billion over the next five years, with about $14 billion coming from cuts in overpayments to Medicare Advantage, the private plans. It will save taxpayers about $45 billion over the next 10 years. New consumer protections will be put in place to reduce deceptive marketing by private plans and to hold them more accountable. Other improvements include reduction of copayments for mental health services from 50 percent to 20 percent (the usual for other Medicare services), new authority for HHS to require coverage of certain drugs, and an increase in low-income assistance for Medicare beneficiaries.

A brief historical review shows just how big a change this overturned veto is concerning overpayments to private Medicare plans. Private Medicare HMOs were first authorized by Congress through the Social Security Amendments of 1972. Payment rates were to be negotiated in advance between HMOs and Medicare on the basis of capitation (ie., the number of enrollees in the plan). HMOs were required to share any cost savings on a 50-50 basis with Medicare, and were limited to a profit of 10 percent of Medicare's payments. The private market found this unattractive, and by 1980 only one HMO had contracted with Medicare.

In an effort to increase enrollment in private Medicare HMOs, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which liberalized payment arrangements for participating plans. It was assumed that managed care would save money, so payments were set at 95 percent of what Medicare expected to pay, by county of residence, for care of enrollees in traditional fee-for-service (FFS) Medicare. Although HMOs continued to complain about poor reimbursement, they could generate large profits by enrolling healthier people needing less care and avoiding sicker patients. It was soon found that sicker patients who were disenrolled by HMOs cost Medicare 160 percent more in the first six months after disenrollment. A 1989 report estimated that Medicare was paying 15 to 33 percent more for care of beneficiaries in private HMOs than in Original Medicare.

When Republicans took control of both houses of Congress in 1994, they increased their efforts to privatize Medicare. The Balanced Budget Act of 1997 (BBA) created Medicare + Choice (M+C) plans, with complex reimbursement arrangements that still afforded substantial profits by cherry picking the market. Private plans were not required to adjust their payments because of the lesser risk of their enrollees. The General Accounting Office in 2000 reported that Medicare spent about 21 percent more on M+C enrollees than it would have spent under Original Medicare. Despite this news, Congress passed the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) that same year, which further increased M+C payments, with fewer regulatory requirements. Many M+C HMOs gamed the system, raising premiums to generate higher profits, restricting services, and then often exiting the market.

More recently, of course, we had the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) (also dubbed the Medicare Middleman Multiplication Act by New York Times columnist Paul Krugman). The MMA continued generous overpayments to Medicare Advantage (MA), the successor to M+C. Overpayments of MA plans average 13 percent higher than Original Medicare (19 percent higher for the most popular private fee-for-service ((PFFS) plans, still with no effective risk adjustment.

So history over three decades is quite clear that private plans cost more than traditional Medicare, are less reliable, and wouldn't be in business at all without overpayments. The privatized Medicare experiment has failed. The latest action by Congress is an important first step in reversing the failures of privatization, but much more needs to be done. These further reforms are high on the list for further action by Congress:
• eliminate all overpayments entirely (there are still $150 billion in overpayments available to private Medicare plans over the next 10 years, despite this recent modest cut)
• require a level playing field for all private plans (they won't play!)
• add cost-effectiveness as a criterion for determining coverage and reimbursement policies of Medicare
• and allow the government to use its bulk purchasing power to negotiate discounts for drugs, medical devices and supplies.

Let's hope that last week's overwhelming votes in Congress opposing conservative rhetoric and the health insurance lobby emboldens those running for Congress this year, the 2009 Congress, and our new President (Obama!) to build on this important first step toward health care reform.

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Adapted from Shredding the Social Contract: The Privatization of Medicare, Common Courage Press, 2006, and by John Geyman, With permission of the publisher, Common Courage Press, Monroe, ME.