The $9 billion in Extra Cash From Medicare

Posted on Posted in Part D Precription Drug, Prescription Drug Plan

On January 4, 2019 the Wall Street Journal published a powerful article written by Joseph Walker and Christopher Weaver describing how Medicare Part D insurers kept $9.1 billion more in taxpayer funds than they would have had their estimates been accurate from 2006 to 2015.

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In the WSJ  article, the writers do a deep dive into the complexity of Centers for Medicare and Medicaid Services, CMS, Medicare Part D funding to private insurers.

Here are some of my takeaways from the article:

  • The private insurers submit “bids” for each plan estimating how much it will cost them, including administrative costs and profit margin, to provide the prescription drug benefit. Medicare uses those estimates to make monthly payments to the plans.  Think of it as an “advance” against future expenditures.
  • After the plan year ends, Medicare compares the actual plan expenses to what was estimated in the “bid.”
  • If the plan overestimated its expenses, and received more funding than the plan’s actual costs, the plan does not return all of the the excess but rather can keep a sizable share which is above and beyond the profit margin built into the bid estimate. WSJ says in 2015 the insurers overestimated costs by $2.2 billion, paid half back and kept about $1.06 billion. Pure profit.
  • And, in what WSJ calls the “two guess” system, Congress created “direct subsidies” and “reinsurance subsidies” for when plans under estimated its expenses by 5% or more. Who pays this? You guessed it – taxpayers.

WSJ reports 46% of all Part D members in the analysis were in plans that resulted in windfalls to the private insurers and only 1% in plans that were not.

The article’s closing paragraph sums it up:

“The Obama and Trump administrations have both proposed slashing the reinsurance subsidy and increasing plans’ risk for patients with very high drug costs. The change can be made only by an act of Congress, and legislators aren’t actively considering it.”

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