How to Cut $154 Billion From Medicare Without Hurting Seniors

03/18/2010 05:12 am ET | Updated May 25, 2011

Health care reform critics have tried to scare seniors by claiming that reform will jeopardize Medicare. But reform actually puts the squeeze on Medicare privatization -- and a new report to Congress shows just how much cutting can be done without so much as nicking patient care.

The health care legislation moving through Congress is funded, in part, by cutting $154 billion in payments over a period of years to Medicare Advantage plans -- the all-in-one privatized HMO and PPO option that seniors can choose as an alternative to basic Medicare.

How might health insurance companies tighten things up if the Advantage cuts occur? Let's see. How about $121 million in corporate retreat expenses? Or $3.5 million for sales meetings? Maybe the millions in management compensation -- like the $35 million earned in one year by a single insurance company executive?

Advantage enrollment has been growing rapidly since 2003, when the Bush Administration beefed up the programs. The idea was to revitalize privatized Medicare options by boosting federal payments to the plans. In fact, Advantage plans receive 14 percent more per-patient than what is spent on basic Medicare beneficiaries.

But a new, little-noticed report to Congress shows that Advantage plans are spending less of every premium dollar they receive on actual medical care delivery than basic Medicare. This is measured through a statistic called the "medical loss ratio" -- the percentage of premium revenues that plans spend on care.

The report, prepared by the majority staff of the U.S. House Committee on Energy and Commerce, examined the books of 34 major Advantage plans. The committee requested -- and received -- detailed financial information from the insurance companies on their insurance plans -- and also on executive compensation, bonuses, stock options and travel perks.

Some of the most appalling findings:

  • Two-thirds of Advantage plans reported ratios under 85 percent for at least one year between 2005 and 2008, and one plan spent as little as 36 percent of its revenue on care in 2007. Overall, the plans reported average loss ratios of 85 percent -- but that is far less than traditional Medicare's 98 percent ratio.

  • One insurance company with a 2007 loss ratio of 79 percent paid over $35 million to a single executive that same year, and compensation packages worth more than $1 million each to 16 other executives.

  • In 2008, the company with the lowest medical loss ratio (66 percent) awarded $34 million to 16 executives.

  • Twenty-three companies with loss ratios under 85 percent spent $121 million on 355 corporate retreats for executives, insurance brokers and board members between 2008 and 2009. One company with a loss ratio of 82 percent in 2008 spent nearly $2 million that year to send 445 employees to Cancun, Mexico for a week-long sales meeting, and spent another $1.5 million for another meeting in Edinburgh, Scotland.

Medicare will pay $12 billion more for Advantage beneficiaries this year than it would if the beneficiaries had participated in basic Medicare. Yet, the report raises questions about the quality of Advantage programs, noting that only half of the Advantage plans offered nationwide receive "above average" ratings from the Centers for Medicare and Medicaid Services, which publishes annual rankings based on its own analysis of patient outcomes and customer satisfaction ratings.

Aside from these findings, there's the challenge Advantage participants face when they shop for plans. Enrollment for Advantage and Medicare D prescription drug plans occurs during a six-week window from November 15 to December 31st each year. Many plans revise their benefits annually -- especially the drug coverage -- which means consumers need to shop annually to assure they're getting the best possible coverage.

If you'd like to read the provocative findings about Advantage plans in the report to Congress, download it here.