Medicare Rx Plan: Overhead Too High?

Oct. 16, 2007 -- Insurance company data show that administrative costs and profit taking by insurers are limiting seniors' savings under the Medicare prescription drug benefit, according to a report issued by congressional Democrats.

The report is based on data from a dozen large firms offering Part D coverage, as the Medicare prescription drug benefit is known. It concludes that insurers don't cover prescription drugs as efficiently as other government programs do. The report also says beneficiaries and taxpayers could be saving billions of dollars per year if seniors got their Part D benefits directly from Medicare instead of through insurance companies.

"Privatizing the delivery of the drug benefit has enriched the drug companies and insurance industry at the expense of seniors and taxpayers," says Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee, which issued the findings.

Republicans and insurance companies refuted the findings, saying that Part D has saved seniors money since it began offering benefits in 2006.

Part D gets overall high satisfaction ratings from Medicare beneficiaries. But some Democrats have bristled at the plan's reliance on for-profit insurance companies.

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Administrative Costs

The report concludes that administrative costs run nearly six times higher in private insurance companies than in Medicare's traditional fee-for-service programs. According to the report, $4.6 billion went to into administrative costs and other company expenses in fiscal year 2007. Nearly $1 billion of that amount was steered toward insurance company profits, the report concludes.

The report also criticizes insurers for gaining smaller cash rebates from drug companies than the Medicaid health program for the poor typically receives.

"The program's inflated administrative costs and meager drug rebates will cost taxpayers and seniors $15 billion this year alone," Waxman says in a statement.

Insurance Industry Defends Record

Insurance industry representatives countered that Part D's total costs are below initial projections from when the program was passed in late 2003. They also pointed out that seniors' average premiums are about $12 per month lower now than the $37 per month originally projected.

"No federal program can claim a track record like that," Karen Ignani, president of America's Health Insurance Plans, an industry lobbying group, tells WebMD.

Republicans issued a statement accusing Democrats of launching an ideological attack on a popular benefits program.

Congress is expected to consider Medicare legislation some time this year. Democratic leaders have not said whether they intend to alter the Part D program as part of that effort.