qotd: Private insurers game Part D

Health Affairs

October 28, 2010

Fixing Flaws In Medicare Drug Coverage That Prompt Insurers To Avoid Low-Income Patients

By John Hsu, et al

Abstract

Since 2006 numerous insurers have stopped serving the low-income segment of the Medicare Part D program, forcing millions of beneficiaries to change prescription drug plans. Using data from participating plans, we found that Medicare payments do not sufficiently reimburse insurers for the relatively high medication use among this population, creating perverse incentives for plans to avoid this part of the Part D market. Plans can accomplish this by increasing their premiums for all beneficiaries to an amount above regional benchmarks. We demonstrate that improving the accuracy of Medicare's risk and subsidy adjustments could mitigate these perverse incentives.

http://content.healthaffairs.org/cgi/content/full/hlthaff.2009.0323v1

Comment:  Under the Medicare Part D program for prescription drugs, private insurers are paid more for lower-income subsidized patients with greater health care needs. Since the insurers find that the higher payments are still below what they find to be acceptable, they are setting their premiums at rates above the benchmark levels. This results in an automated transfer of these higher-cost beneficiaries to competitors' programs.

As long as Congress continues to insist on using private plans for Medicare Part D, we will always see efforts by the insurers to enroll healthier patients while avoiding the sick - gaming by private insurers sometimes referred to as cherry picking and lemon dropping. (Of course, this is also true of private insurers throughout the individual, small group, and large group markets.)

The authors of this study recommend yet more administrative complexity by introducing additional modifications of the calculations in an effort to reduce these perverse incentives, but such changes certainly would not prevent the insurers from seeking other forms of gamesmanship. They owe it to their investors to game the system as much as possible.

How is the Patient Protection and Affordable Care Act addressing this problem? It isn't. We could have had reform that would increase efficiency and equity while eliminating the private insurers, but Congress rejected that. It's still not too late to change.