How A Small Tweak To Medicare Could Net The U.S. Hundreds Of Millions In Savings Every Year

A new government report from the Department of Health and Human Services (HHS) finds that Medicare Part D — the prescription drug benefit that helps eligible seniors afford the medication they need — could have made over $111 million in 2009 alone with a simple change to the way it pays insurers. The findings illustrate that smart systemic tweaks to Medicare’s payment structure could significantly reduce the program’s costs without the need to slash benefits for elderly Americans.

Medicare Part D currently subsidizes the cost of medications on private prescription drug plans — but as the program is structured right now, those private plans can make money off of payments from the federal government without having to provide benefits. Under current law, Medicare has to make advance payments to seniors’ prescription drug plan provider at the beginning of every month. So even if a senior doesn’t submit a claim for drug coverage that month, their plan provider still gets paid.

There’s nothing wrong with that; it’s just how insurance works. But the 2003 law that created the drug benefit also allows private Part D plans to “invest these Medicare funds in interest-bearing instruments until the funds are needed to pay for drug costs and administrative services.” That allows private insurers to take federal Medicare dollars, invest them in an account that garners interest, and then keep netting those interest profits until the beneficiary submits a claim and forces the insurer to pay out. There are no limits to how much money insurers can make off interest payments in this fashion.

And as it turns out, this is costing the government millions of dollars in potential savings every month. The HHS report found that in calendar year (CY) 2009, Part D plans held onto — and profited off of — federal Medicare funds for an average of 20 days before having to pay out pharmacy claims. The auditors go on to explain that if the situation were simply reversed, and the federal government was allowed to hold on to and invest those funds for 20 days before having to pay the private insurer, then Medicare would have netted “$111.2 million of interest income in CY 2009.” Although the Center for Medicare Services claims that such a policy change would just lead Part D providers to raise the price of their bids to the government, the report points out that any decreased savings from such a move would be offset by “the higher interest earned by Medicare trust funds” compared to that earned by Part D plans.

What this goes to show is that there are a multitude of ways to reduce entitlement spending without resorting to extreme measures that punish seniors, like slashing their health benefits or shifting medical costs onto them. As health care reform advocates have explained time and time again, the supposed instability of America’s entitlements has very little to do with the government programs themselves, and everything to do with how much money those programs have to pay providers for health care. Most of that high cost is due to the nonsensically high and arbitrary price of American health services — but those prices are further inflated by the exact kind of over-payments to providers and missed earning opportunities illustrated in the HHS report.

Reducing those excess payments and implementing policies that drive down the actual cost of care — for instance, by tying Medicare drug rebates to the same low rates as Medicaid, which could save $180 billion — is the smartest and most effective way of preserving safety net programs. President Obama has included these kinds of Medicare savings in his budget proposals, in addition to slashing $716 billion in excess payments to private providers through Obamacare. But for the time being, national Republicans seem far more interested in dismantling protections for seniors than taking real steps to find common-sense solutions.