WASHINGTON — Many large employers are struggling with the obligation to cover the rising medical costs of retirees, but last year officials in Michigan found a way to save at least $40 million on care for retired teachers and other public-school workers: Send the bills to Washington.
Almost overnight, by taking advantage of a little-understood feature of Medicare, the school retirement system shifted a big chunk of the healthcare costs of more than 100,000 retirees off its budget and onto the federal government. This year, the state is shifting its civil service retirees too.
Michigan is not alone. Across the country, state and local government agencies, big nonprofit organizations and major corporations are rushing to do the same. One result is that the Medicare trust fund is evaporating even faster than expected.
At the heart of what critics say is a major cost-shifting maneuver is a program called Medicare Advantage, which pays private insurers a bonus to take over Medicare coverage for seniors.
The payments to the private insurers average more per senior than the cost of care with regular Medicare. The bonus payments enable insurers to offer features that seniors in regular Medicare don't get.
That has made the private plans attractive to individual seniors, with nearly 9 million -- about 1 in 5 -- now enrolled in them.
And, in addition to lifting a financial burden for companies and government agencies, the program has helped boost insurance company profits.
But as seniors switch into such private plans, Medicare Advantage is hastening the depletion of the already stressed Medicare trust fund.
And monthly premiums have risen for everyone -- including the 80% of seniors who remain in regular Medicare -- because the premiums are tied to the government's overall costs. Seniors in regular Medicare don't get the extra benefits available through private plans even though they help pay for them; many buy supplemental coverage.
"My jaw dropped when I heard the kind of moneys that were following these programs," said Chuck Agerstrand, who oversees benefits for the Michigan Education Assn. teachers union. "I can understand the [federal] bureaucrat who says we're pumping too much money into these programs. A question arises as to how long will these subsidies last, and if they disappear tomorrow, what will happen?"
Some lawmakers of both parties have begun to question whether the Medicare Advantage program needs an overhaul. "It's a runaway train," said Senate Budget Committee Chairman Kent Conrad (D-N.D.).
Seniors lobby AARP and the American Medical Assn. want to curtail payments to private plans.
But President Bush remains a steadfast supporter. And the insurance industry counters that interfering with the private plans would disrupt the lives of millions of seniors and jeopardize improvements that could save money in future years. The issue will be a flash point in coming months, because Bush is proposing deep cuts in traditional Medicare.
Enrollment takes off
Medicare is the federal government's biggest healthcare program, serving some 44 million seniors and disabled people. Private insurance plans have been a part of it for more than 20 years, with a seesaw history tied to funding changes decreed by successive Congresses and administrations.
In 2003, the GOP-led Congress decided to deliver a new Medicare prescription benefit through commercial insurers. At the same time, lawmakers wanted to expand the availability of private Medicare insurance plans, particularly in rural areas and some urban centers where payments had been too low to attract insurers.
To draw more companies, the lawmakers increased payments to the private insurers. A new formula created rates that now exceed the average cost of traditional Medicare in virtually every county in the U.S. But insurers are required to return some of the money to seniors in the form of extra benefits or lower co-payments.
Insurers eagerly embraced the opportunity, which came at a time when the market for employer-based insurance was sputtering. Private-plan enrollment took off, but higher-than-expected costs for the government soon followed.
Currently, payments to private plans average 113% of the cost of care for comparable seniors in regular Medicare.
"It fosters choice, but we don't see it driving down prices below what the cost would be under traditional Medicare," said economist Robert Reischauer, whose opinion on healthcare matters is respected on both sides of the political aisle. "There is something wrong with this picture."
Within the Medicare Advantage program, there are several types of plans. Many are managed care plans like health maintenance organizations and preferred provider organizations. But lately, most of the concerns about the program have focused on a third type, called private fee-for-service plans.