We’re talking about Medicare and especially how its prescription drug policies fail seniors. In Part I of this series, healthcare economist John C. Goodman told us some little-known facts about Medicare:
- Medicare was the last major insurer to cover drugs
- Medicare drug coverage reflects politics, not rational insurance principles
Today, we continue this series with some more facts about Medicare from Mr. Goodman:
Medicare requires three premiums for three different insurance plans.
If you’re a senior, you’re probably paying separate premiums to three different insurers: one for Part B coverage for doctor’s visits, a second for Part D coverage for drugs, and a third for Medigap insurance to plug the holes in Part A (hospital care) and Part B. Yet, because the suppliers of these three plans have differing financial interests, the results are waste, inefficiency and inferior patient care.
Consider the effect of having one insurer cover drugs, while the other two are covering medical care. If a diabetic skips his insulin and other medications, that is actually profitable for the drug insurer – since they don’t have to cover the cost of the insulin. However, this noncompliance with taking insulin probably leads to emergency room visits, even hospitalization, if the diabetic’s blood sugar goes hayward. These additional costs will be borne by the other two insurers. Since the differing insurers have differing financial interests, there is no possibility of alignment with the goal of cost-effective, well-managed care.
Medicare creates perverse incentives to tax the sick for the benefit of the healthy.
When insurers are forced to charge community-rate (charging the same premium regardless of health status) and there is no adequate risk adjustment, they will have an incentive to overcharge the sick (to discourage enrollment) and undercharge the healthy (to encourage their enrollment).
In Medicare Part D, this perverse incentive leads to distorting effects in the “rebate” system. For example, say a diabetic goes to a pharmacy where the list price of insulin is $100. Her 25 percent copayment amounts to $25. However, unbeknownst to her, the insurer is getting, say, a $90 rebate from the drug company that produces the insulin. That means the real cost of the insulin to the insurer was only $10, so a fair out-of-pocket charge to the patient would be only $2.50, not $25.
What happens to that “profit,” which the insurer makes but doesn’t share with the patient? It gets competed away by charging lower premiums for buyers of Part D drug insurance. In this way, the system causes the sick who need drugs to be overcharged while the relatively healthy premium payers are undercharged. Is there a better way?
How the private sector differs from Medicare.
It’s that time of the year when Medicare enrollment is open so we’re all seeing ads for Medicare Advantage plans. Roughly half of all Medicare enrollees are participating in the Medicare Advantage program – where they enroll in private plans that look very much like the plans employers offer. Although these plans are regulated by the Medicare bureaucracy, they have enough freedom and flexibility to avoid some of traditional Medicare’s worst features.
If you enroll in Medicare Advantage (MA), you pay only one premium to one insurer, who is responsible for all costs. That means the insurer has a non-conflicted, integrated interest in keeping patients health and in minimizing costs. These plans have just as much economic incentive to attract the sick as the healthy. So, instead of a rebate system, these plans pass along any discounts from drug producers to the patients – and even more so.
For example, in the Houston area Aetna, Cigna, Anthem, and Oscar insurance plans all offer MA plans that make maintenance drugs for the chronically ill completely free or available at a very nominal fee. A diabetic would tend to pay nothing for insulin and other drugs and would have access to an endocrinologist at no charge or for a $5 copay. That’s because the plans believe that by lowering these costs to the patients they are avoiding the higher costs of severe illness.
Goodman concludes, “Given the freedom to so, private health care and private health insurance can meet patient needs far more effectively than health plans operated and directed by government.”
Author’s note: If you’re considering enrollment in a Medicare Advantage plan, be sure your doctors are participating providers in the plan before you sign up. Not all physicians who accept Medicare will also accept the MA plan you want.