Supplemental Medicare plans provided by private insurance companies are wasting billions of tax dollars annually in overpayments.

The Medicare supplements, designed to cover gaps in government coverage, have consumed more than $282 billion since 1985. Much of this waste has come about in the last nine years, following the Bush administration’s decision to boost Medicare Advantage (MA) payments to insurers.

According to a new study by Dr. Ida Hellander and two doctors from City University of New York School of Public Health at Hunter College, Steffie Woolhandler and David U. Himmelstein, “In 2012 alone, we estimate that private insurers are being overpaid $34.1 billion, $2,526 per MA enrollee, 6.2 percent of total Medicare spending this year.”

The three doctors, who are members of Physicians for a National Health Program, concluded that Medicare supplements aren’t helping the problem of providing care to elderly Americans. But they are draining the federal budget of enormous sums of money.

Private Medicare plans are used by 27% of Medicare enrollees. The biggest players in the plan are UnitedHealth and Humana, which account for one-third of the participants. Medicare pays these companies an average of $10,123 per person per year to cover anticipated hospital and doctor expenses. But the authors of the study have identified five ways in which health insurance companies increase their profits while the government pays.

• People who enrolled before 2004 did so at rates that were evaluated with few risk factors. So a healthy 70-year-old paid as much as an unhealthy one. The private plans used marketing techniques to recruit healthier enrollees while discouraging those with more serious problems.

• Since 2004, more risk factors have been taken into account when enrolling Medicare customers. The private plans adjusted to this. If a potential enrollee could be proven to be prone to a serious condition, the companies could charge Medicare more for their premiums. So the companies identified people with mild cases of such conditions as arthritis, heart failure and bronchitis, and billed them as if they had serious cases of the same problems.

• In 2003, the health insurance industry pushed through Congress the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), which increased premiums allegedly to indirectly cover medical education. These added fees were supposed to go to hospitals, but are in fact usually absorbed by the insurance companies.

• The multi-billion dollar “Medicare Advantage Quality Bonus Payment Demonstration” program, which was part of President Barack Obama 2010 health care reform, was supposed to give extra money to private plans that do a good job of providing high-quality care, Instead, the bonus payments have been given to “virtually all MA plans.”

• Medicare pays the insurance companies full benefits even a patient’s care is provided and paid for by the Veterans Administration, so the government ends up paying twice for the same treatment.

-David Wallechinsky

To Learn More:

Medicare Overpayments to Private Plans, 1985-2012 (by Ida Hellander, Steffie Woolhandler and David U. Himmelstein, Physicians for a National Health Program) (pdf)

Overbilling by Doctors and Hospitals Costs Medicare a Billion Dollars a Year (by David Wallechinsky and Noel Brinkerhoff, AllGov)

The Long History of Predicting Medicare Will Run out of Money (by Noel Brinkerhoff and David Wallechinsky, AllGov)

GAO Urges Obama to Cancel Wasteful Medicare Experiment (by Noel Brinkerhoff, AllGov)