PRIVATE REMEDY
Insurers Fight to Defend
Lucrative Medicare Business

As Democrats Push Cuts,
Trade Group Targets
Minority Lawmakers

By SARAH LUECK

Wall Street Journal
April 30, 2007; Page A1

WASHINGTON -- The Medicare overhaul passed by the Republican-controlled Congress in 2003 represented an odd ideological mix: A government program got bigger, but it was also opened wider to private enterprise. Seniors could gain extra coverage if they signed up to receive their Medicare benefit through a private insurer.

Companies such as Humana Inc. and UnitedHealth Group Inc. jumped to expand their Medicare business. The number of Americans in so-called Medicare Advantage plans administered by a commercial health insurer is expected to grow this year to more than eight million.

• The Issue: Democratic-controlled Congress may try to slash the payments that insurers receive as part of Medicare Advantage program.
 
• The Players: Seniors who get extra benefits through the plans; insurance lobbyists; and minority-advocacy groups worried about the impact.
 
• What's Next: The fight will come to a head as Democrats look for ways to offset new health spending.
 

Now the boom is at risk, because Democrats control Congress and many of them want to slash the payments insurers receive. Insurers still think private enterprise will improve health care -- the idea that attracted President Bush. But their far more prominent argument this year is that cutting Medicare Advantage payments would be tantamount to cutting Medicare itself.

Some of the main targets of the industry's wooing are minorities friendly to the Democratic Party. Today, America's Heath Insurance Plans, the industry's trade group, is scheduled to unveil a "minority advisory committee" that will tell lawmakers about the "value Medicare Advantage provides to vulnerable seniors." Former Denver Mayor Wellington Webb, who is African-American, and former Miami Mayor Alex Penelas, a Cuban-American, are on the committee, according to AHIP.

Louis Stokes, a former Democratic representative from Ohio who headed the Congressional Black Caucus, is now a lobbyist, with UnitedHealth as one of his clients. He has been making the rounds of Black Caucus members. Mr. Stokes says Medicare Advantage plans have helped low-income and minority people by closely monitoring chronic diseases and reducing reliance on emergency-room visits. Supporting the program "is a very legitimate position for members of Congress to take who are concerned about what is happening in American health care today," he says.

The insurers' strategy frustrates California Democratic Rep. Pete Stark, the new chair of the House Ways and Means Health Subcommittee. He's one of the main lawmakers handling Medicare policy, and a leading advocate for Medicare Advantage cuts.

Mr. Stark and other Democrats note that the government is paying insurers more to cover Medicare seniors than it would have to pay if it covered them itself. It's no surprise, they say, that insurers can offer some extra benefits with a subsidy worth billions, but they believe the government could get more bang for its buck by spending that money directly. The congressman contends that some insurers are trying "to cover up their excessive costs and their questionable quality."

Test of the Conflict

An early test of the conflict will come soon as Democrats push to expand the State Children's Health Insurance Program at a cost of $50 billion over five years. They have promised to cover the cost of new programs with taxes or spending cuts elsewhere -- and Medicare Advantage is a prime target.

The role of private insurers in Medicare goes back to the early 1970s, when the government first started paying some health-maintenance organizations to cover seniors. In the 1980s, private insurers were paid a set rate below regular Medicare's costs, as an incentive to save money. Under traditional Medicare, where the government covers seniors directly, doctors and hospitals often receive more money the more care they provide.

For three decades, enrollment in the plans was relatively small, despite moves by Congress in 1999 and 2000 to increase funding in areas where insurers were scarce. In 2003, as Congress was crafting a new prescription-drug benefit for Medicare, the Republican majority and the Bush White House saw a chance to boost them further. At one point, the administration proposed requiring Medicare beneficiaries to join a private plan to get full drug coverage.

Congress wouldn't go that far. But in a nod to those wanting more market-oriented health care, the final legislation sweetened the pot for Medicare Advantage insurers. The legislation boosted payments, let insurers offer new types of plans and created a mechanism to funnel savings plans achieve on hospital and doctor services into extra benefits.

In Medicare Advantage, seniors often pay lower out-of-pocket costs than they would in traditional Medicare. They also may get coverage for items like eyeglasses and routine dental care that traditional Medicare usually doesn't pay for. However, Medicare Advantage may require people to go to a limited network of doctors. While almost all seniors have access to at least one Medicare Advantage offering, benefits and costs vary widely from plan to plan.

Another Tradeoff

There's another tradeoff: a higher bill for Uncle Sam. Research by Brian Biles, a George Washington University professor, estimates the average person in Medicare Advantage will cost the government $8,691 in 2007. If the same person stays in regular Medicare the government will save $1,074 and spend only $7,617, according to Mr. Biles, who is on temporary sabbatical while working part-time for Mr. Stark. Congress could save $54 billion over the next five years by reducing Medicare Advantage payments to the level of regular Medicare costs, according to congressional budget analysts.

AHIP, the insurers' group, says the difference in costs is not as wide as such estimates suggest, but it does not offer its own estimate. The group says the difference results in part from past congressional decisions to increase payments in areas where private insurers have to pay doctors and hospitals more than the government does.

The number of beneficiaries choosing Medicare Advantage is set to rise to more than eight million this year, nearly 20% of the total in Medicare, from 5.3 million in 2003. The government is set to pay $76.3 billion to participating insurers this year, up from $36.5 billion in 2003.

Most of that money goes to pay for health care, but some insurers are turning a tidy profit from what remains. Goldman Sachs estimates that Humana, a leader in the field, will earn 66% of its net income from Medicare Advantage this year. The company has projected net income of around $4 to $4.20 per share this year, which comes to between $670 million and $705 million. At UnitedHealth, Goldman Sachs estimates Medicare Advantage will account this year for 11% of net income. The company has projected net income of about $4.5 billion.

The Congressional Budget Office predicts the annual Medicare payouts to insurers will surge to nearly $200 billion over the next decade. That's assuming Medicare Advantage stays as is -- which it won't, if key Democrats have their way. "These excessive payments are wasteful and result in unnecessary costs for the program," said Rep. Frank Pallone, a New Jersey Democrat who is chairman of the Energy and Commerce Committee's health panel, at an April 18 hearing. "It seems to me that no matter how you try to sell it, it's just lipstick on a pig."

Preparing for Attacks

AHIP Chief Karen Ignagni began preparing for such attacks last year, expecting that tight budgets would increase attention on Medicare spending no matter which party ran Congress. Ms. Ignagni is one of the capital's most prominent lobbyists and made $1.24 million last year. A former employee-benefits specialist for the AFL-CIO, she understands better than most how to work both sides of the aisle on Capitol Hill.

Ms. Ignagni says the fight over Medicare Advantage isn't purely partisan. Some Democrats from states like New York and Massachusetts have supported increased funding, she notes, because they wanted their constituents to have access to improved benefits.

She's hoping to gain more Democratic support with the help of the political-consulting firm Dewey Square Group. It is packed with well-known operatives including Michael Whouley, a field-operations whiz credited with bringing John Kerry's presidential campaign back to life in 2004. Having just led a successful get-out-the-vote effort for House Democrats in 2006, Mr. Whouley agreed to take on the AHIP campaign. In February, AHIP flew in about 30 members of Dewey Square's field staff to Washington for a crash course on Medicare Advantage. AHIP declined to say how much Dewey Square is being paid.

So far, AHIP and Dewey Square have made the impact of cuts on low-income and minority beneficiaries a major part of their message. They describe Medicare Advantage as a safety net for a subset of Medicare beneficiaries: those with incomes of $10,000 to $20,000 a year and who lack supplemental coverage like Medicaid to fill in regular Medicare's out-of-pocket costs. Significant percentages of minority groups fall in this category, AHIP says.

Democratic leaders such as Rep. Stark support helping lower-income seniors with out-of-pocket costs, but they say it's more efficient for the government to give the aid directly. Democrats also argue that Medicare was designed to provide a uniform benefits package. They say it's unfair that everyone can't enjoy advantages available only under some plans in certain parts of the country.

Fighting Cuts

AHIP also is fighting cuts by encouraging beneficiaries to write or call their representatives in Congress, working through a 250,000-member advocacy group it has funded since the 1990s, the Coalition for Medicare Choices. AHIP chose 50 members of Congress as targets, mostly Democrats in leadership posts or from areas with high Medicare Advantage enrollment. Field operatives hired by Dewey Square are arranging calls and visits between seniors and lawmakers.

One recent phone message from a Texas coalition member to a lawmaker: "I want you to vote 'no' for changing Medicare Advantage... We need all the help we can get, and I'm sick and tired of everyone trying to hurt the elderly."

While Democratic leaders haven't proposed any specific cuts, they could do so as soon as this summer. As jockeying continues on Capitol Hill, AHIP hopes the targeted legislators will think twice about making big Medicare Advantage cuts a centerpiece of any bill.

"The debate now is turning," Ms. Ignagni says. "It's turning from a debate about reports to a debate about people."

In March, after frequent contact from insurers and Dewey Square, two prominent groups sent letters to Congress opposing Medicare Advantage cuts: the Washington office of the National Association for the Advancement of Colored People and the League of United Latin American Citizens. Brent A. Wilkes, the league's executive director, says he discussed Medicare Advantage with Mark Magaña, principal of a consulting firm hired by UnitedHealth, and with Dewey Square principal Cynthia Rotunno, who used to be the league's national operations director.

Focus on Minorities

The focus on minorities was evident at a briefing earlier this month for aides to black, Latino and Asian-American lawmakers. To get aides to attend, Dewey Square principal Maria Meier, former executive director of the Congressional Hispanic Caucus, sent emails. Inside, the staffers heard Aetna Inc. Chief Executive Ronald A. Williams, who is African-American, describe how Aetna had improved the care of a 78-year-old African-American woman with heart trouble by checking in with the daughter-in-law cooking her meals.

The minority advisory committee that AHIP is unveiling today includes about three dozen prominent black, Latino and Asian-American leaders in 16 states. Union officials, pastors and representatives of the NAACP and League of United Latin American Citizens are among the members.

Some Democrats say the insurers' pitch has left the impression that a disproportionate number of minorities are in Medicare Advantage. An email from Ways and Means Democrats on April 20 noted that the portion of minority beneficiaries in Medicare Advantage "differs little" from the portion in regular Medicare. AHIP says it has been straightforward in presenting the information.

California's Mr. Stark believes Congress will eventually have to squeeze Medicare Advantage because there are few other places to find money for new health programs. "My sense is the strategy is, 'Don't touch us,' " Mr. Stark says. "And I just don't think that's realistic."

But at a hearing Mr. Stark held in March on Medicare Advantage, Rep. Stephanie Tubbs Jones, an African-American Democrat now representing Mr. Stokes's former Ohio district, pointedly questioned a Medicare expert about his recommendation to reduce Medicare Advantage payments. Such cuts, Ms. Tubbs Jones said, could cause vulnerable seniors to lose benefits.

Ms. Tubbs Jones and Mr. Stokes both say they speak frequently about a variety of issues but can't recall specifically discussing Medicare Advantage.

"It's a program where a significant number of minority seniors have decided to place themselves," Rep. Tubbs Jones said in an interview this month. She said, however, that she was "not prepared to say" whether she'd support cutting Medicare Advantage to raise children's health benefits. AHIP has added Ms. Tubbs Jones to its list of targets.

Write to Sarah Lueck at sarah.lueck@wsj.com