Obama budget chief firm on Medicare Advantage cuts

President Obama's budget chief isn't sugarcoating his message to health insurance executives: the party is over.

White House Budget Director Peter Orszag said Tuesday the government will no longer overpay companies that offer Medicare Advantage plans, the privately run portion of the government health program for seniors.

For more than 10 years, companies like Humana Inc. and UnitedHealth have defended their plans, pointing out they offer lower premiums and extra benefits compared with government-run Medicare. More than 10 million of the 44 million seniors in Medicare receive care through the plans.

But Orszag reiterated what industry executives have long known: the government spends significantly more money on Medicare Advantage than its own plan. When private insurers first entered the Medicare program in the late 1990s, many lawmakers assumed companies would lower costs with their managed-care strategies.

More than a decade later, though, the government spends about $1.30 on Medicare Advantage patients for each dollar it spends on patients in traditional Medicare, Orszag said, speaking at the America's Health Insurance Plans' annual conference.

He added that the cost burden falls on taxpayers as well as patients in regular Medicare, who pay higher premiums.

"I believe in competition. I don't believe in paying $1.30 to get a dollar," Orszag told conference attendees, including representatives from Aetna Inc., WellPoint Inc. and Cigna Corp.

The group's president, Karen Ignagni, said insurers would offer alternative proposals for controlling Medicare costs and hoped the White House would consider them.

Orszag's address came less than a week after President Obama kicked off his health reform effort with a massive summit at the White House. In his remarks to more than 100 health care experts and stakeholders, Obama said he is willing to compromise on details to reach his overall goal of improving care and covering more people. As one of the interest groups that helped derail the Clinton health reform effort in the early '90s, gaining health insurers' cooperation is critical.

But Orszag showed little intention of compromising on the Medicare Advantage issue. In his previous job as director of the nonpartisan Congressional Budget Office, Orszag frequently warned lawmakers that the ballooning cost of Medicare was among the greatest threats to the nation's long-term economic health.

Under President Obama's recent budget proposal, Medicare Advantage companies would have to compete to offer their services in different parts of the country. The government payment for each region would be based on the average bid submitted by companies, saving $177 billion over 10 years, according to the White House. Under the existing system, payments are calculated annually using a preset formula.

Worries about the plan have sent shares of health insurers nosediving over the past several weeks, as investors were concerned about the effect on the insurers' profitable Medicare Advantage business.

Orszag reiterated Tuesday that the best chance to solve the country's current health care predicament is to eliminate billions of dollars worth of wasteful spending. He pointed out that different regions of the country spend vastly different sums on seniors in Medicare, without showing much difference in health outcomes.

The budget director cited figures from researchers at the Dartmouth Institute for Health Policy, who for decades have documented unnecessary care in the U.S. Researchers there have estimated that about 30 percent of U.S. health care spending, or $700 billion, could be eliminated without hurting the quality of care.

Orszag assured executives that insurers are not the only group being asked to change how they do business. As part of his economic stimulus package, Obama provided $1.1 billion in funding for research comparing the effectiveness of various medical treatments. By rewarding physicians for using the most efficient practices, the administration hopes to reduce health care costs.

"We are pushing hard on changing incentives for providers so that we are rewarding better care and not more care," Orszag said.