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Will This Medicare Twist Cause You Pain? Humana Inc. (HUM), WellPoint, Inc. (WLP)

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Imagine you’re a member of Congress. While you’re accustomed to spending money hand over fist (and hand over every other part of the body, for that matter), you know deep down in your gut that the spending needs to gain some semblance of control. Now imagine that one of your staff brings to your attention a recent finding about a twist in Medicare managed care that could mean that the insurance companies running these programs are paid too much.

Your immediate response is, “Aha! Here’s a way to cut costs that won’t make me lose votes in the next election! We’ll just pay those evil insurance companies less.” You direct your staff to put together legislation to reduce Medicare spending. While, like many members of Congress, you won’t actually read the bill that you vote for, you will feel good that you have helped taxpayers save money. As for those insurance companies, who cares?

Humana Inc (NYSE:HUM)This scenario could be played out in the halls of Washington, D.C. in the not-too-distant future thanks to a recent report from a researcher at the Centers for Medicare and Medicaid Services, or CMS. Here’s the background — and what it could mean.

The twist
Gerald Riley at CMS decided to look into what happens with members of Medicare Advantage plans who switch over to traditional fee-for-service Medicare. What he found was that these members incur costs nearly 28% higher than similar members already in fee-for-service plans. The members who were initially in Medicare HMOs had the biggest cost difference.

Another study published in December in Health Affairs found that members who left Medicare Advantage plans to join traditional Medicare were “much more likely” to report worsened health than other Medicare beneficiaries. However, according to the researchers, changes made to Medicare Advantage in 2006 that limited members to switching only once per year did help improve the situation.

Neither of these two reports suggested that organizations offering Medicare Advantage programs were somehow cherry-picking healthier members. The implication, though, is that insurers running Medicare Advantage could be benefiting financially by not having to pay higher medical costs for patients who switch to traditional Medicare.

Washington to the rescue
Don’t think for a minute that politicians won’t jump to find ways to “fix” this issue. Expect alternatives along two general lines of thinking.

One approach could be to try to force Medicare Advantage programs to offer fewer limitations, therefore becoming more like traditional fee-for-service. The problem with this approach is that such actions could undermine the principles of managed care that seem to be working.

Advocates for applying these principles to Medicare point to several examples of success. For instance, another report in the same issue of Health Affairs found that members of Medicare Advantage plans were admitted less frequently to emergency rooms, had fewer elective surgeries, and obtained some types of recommended care more often. Another study by the Agency for Healthcare Research and Quality concluded that members of managed-care plans were less likely to require hospital treatment.

A second approach for addressing the issue could be to simply pay less per enrollee to companies offering Medicare Advantage programs. The thought behind this option is to shift the cost of the sicker patients who leave the managed-care plans back to the insurance companies. The politics of this approach will probably make it an appealing one to take for many on Capitol Hill.

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