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AFSCME’s Position – Stopping Privatization of Medicare

A major battle looms in Congress over the privatization of the Medicare program.  Since 2003, the right-wing in Congress and the White House have implemented a stealth plan aimed at moving seniors and the disabled out of traditional, government administered, Medicare and into private health insurance plans.  Because these private plans are more costly than the traditional Medicare program, they threaten the long term financial solvency of the Medicare program.  The privatization of Medicare will ultimately lead to substantial increases in health costs to Medicare beneficiaries, substantial cuts in benefits, or a combination of the two.  Just as the labor movement stopped the privatization of Social Security, we must now act to protect the Medicare program.

Background

Since the 1980s, private plans have been allowed to enroll Medicare beneficiaries in plans that would replace traditional Medicare coverage.  At the time, many in Congress believed that private plans could provide coverage more cheaply.  However, private plans did not get into the Medicare business too heavily because they could not provide benefits to beneficiaries and earn the profit they desired.

In order to realize their vision of privatizing Medicare, right-wing ideologues in the Congress pushed through substantial increases in payments to private plans in 2003 in order to induce the insurance companies to expand their Medicare business and enroll more seniors.  Today, on average, private plans are paid 12 percent, or $1,000 per year, more to cover a Medicare beneficiary than it costs the traditional Medicare program to cover a beneficiary.  However, depending on location and other factors, some plans receive 40 percent, 50 percent, even 70 percent above the cost of traditional Medicare.  These overpayments increase profits and pay for marketing, commissions for insurance brokers and benefit improvements.

Overpayments Threaten Medicare’s Financial Solvency.  Because the overpayments generate large profits, insurance companies have begun to aggressively market their plans.  Today, 20 percent of Medicare beneficiaries are now in private plans rather than in traditional Medicare.  But these excess payments to the private insurance industry are worsening Medicare’s financial health.  Enrollment in the private plans is growing rapidly and enrollment is growing the fastest among the plans receiving the largest overpayments.  Over the next ten years, these payments will add an additional $160 billion to the cost of the Medicare program.  The growth in costs will ultimately force major changes in the Medicare program including substantial increases in the cost to beneficiaries and substantial cuts in benefits.

Medicare Beneficiaries are Already Paying More.  Because cost increases drive up premiums paid by Medicare beneficiaries, all seniors, not just those in the private plans, are paying more now.  In 2007, each beneficiary in traditional Medicare paid an extra $24 per year for the Part B premium to subsidize the overpayments to the private plans.  In the short run, those who move into the private plans benefit from the fact that all beneficiaries help to pay for the overpayments.

Private Plans Reduce Needed Services.  Insurance companies that offer private Medicare coverage are lobbying furiously to keep their excess payments.  They argue that the private plans provide more services to beneficiaries than does traditional Medicare.  The truth is that the private plans are able to redesign coverage and they have used that flexibility to add benefits that appeal to the healthy, who are cheaper to cover, while cutting services or coverage needed by the sick.  For example, some private plans require beneficiaries to pay more for hospital care and chemotherapy.  As a result, those who are sicker can end up being much worse off under a private plan.  Unlike traditional Medicare, many of the plans also restrict choice of doctor and access to specialists.

AFSCME’s Position

The Congress must act to reduce the overpayments.  In order to avoid disruption for beneficiaries already enrolled in the private plans, it may be necessary to reduce the overpayments gradually.  The savings realized from reducing these payments can be used to improve the prescription drug benefit, improve health services for low- and moderate-income beneficiaries, prevent a cut in the Medicare reimbursement to physicians and to help pay for covering more children under the State Children’s Health Insurance Program (SCHIP).

Department of Legislation
June 2007

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