What's at Stake in the New Medicare Bill

A lot of wheeling and dealing got the Senate to pass the bill that's going to President Bush's desk.
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Tuesday, first the House and then the Senate voted to override the presidential veto and approve a Medicare bill into law that reversed the imminent 10.6% cuts in the reimbursements to physicians.

Game over.

After the vote last week

AARP

CEO Bill Novelli praised the Senate, saying the "AARP applauds the bipartisan majority of senators who voted to pass a bill that would protect and improve Medicare for the 44 million Americans who depend on it." They are now celebrating the victory.

However Karen Ignagni, president and CEO of the health insurers body

America's Health Insurance Plans

(AHIP), has a different perspective. She said: "As seniors learn the details of this hastily passed legislation, they will be shocked to learn they could face fewer choices, reduced benefits, and higher out-of-pocket costs."

In the Senate vote, 21 Republican senators defied the presidential veto, increasing the number of Republicans supporting the bill by three and embarrassing the president.

So, what is there in this law that is so controversial and reportedly -- depending on the perspective -- so hurtful to the elderly?

The main issue was to stop a cut in reimbursement of expenses to physicians. Cuts were mandated in 1997, and this is not the first time they have been overridden -- in fact, they are nearly always avoided by both Republican and Democratic legislators.

The difference this year is that the Democrats, in order to "pay" for the 10.6% reduction in Medicare expenses that they wanted to avoid, introduced a measure to cut the level of payments to Medicare Advantage plans (MA), a major part of Republican medical reform.

The physicians will not have their income reduced -- and, in fact, a small increase will occur in 2009 -- but the private insurers offering MA plans will see a reduction. AHIP naturally does not support this, and cautions that there will be negative effects on the elderly.

Democrats say that this is nonsense, and that as MA currently receives reimbursement levels reportedly up to 17% above Medicare rates, they will not be losing anything -- just reducing their profits on the plans.

UnitedHeath Group

(UNH) - Get Report

, ironically the provider of choice to the AARP, recently announced that it was stopping marketing some Medicare Advantage special needs plans that it had been operating because of reduced earnings.

This new law will ensure that the pressure on the company, which recently announced 4,000 job cuts, will not go away. The second-quarter earnings reports will show whether it's the only insurer under pressure.

This law includes much more than a simple restructuring of Medicare costs and expenses.

A controversial new competitive bidding process for the supply of durable medical equipment was due to have gone into place on July 1. This process would have limited the supply of items such as beds, chairs and walkers to approved suppliers, rather than to any supplier who met the pricing requirements for Medicare.

Interestingly, 75% of suppliers who had bid for the status failed to be selected.

The Centers for Medicare and Medicaid Services (CMS) believes that there should be no controversy about the limiting of suppliers, and that there are considerable savings to be made, estimated at $1 billion a year, not only for the government but also for the recipient of the equipment.

Opponents say that the removal of competition would have ultimately led to higher prices.

Nevertheless, now that the bill has been ratified, the procurement process pilot will be placed on hold for 18 months -- plenty of time for the debate to continue.

Some of the cuts in reimbursements under Medicare Advantage affect the teaching hospitals that were receiving expenses, as well as the insurers where they provided clinic care. The double cost will be eliminated.

The high-cost private fee-for-service plans (PFFS) operated by the insurers are now required to establish a provider network unless exempted because of insufficient network plans.

Overall these changes in Medicare Advantage are expected to reduce the rapid growth of the plans and the enrollment in PFFS.

Physicians are being encouraged by the new law to make use of electronic prescriptions by receiving a small increase, and this will become a requirement or they will receive lower payments by 2011.

On an overall positive note for seniors, the new law prohibits the often-uncomfortable situation of having cold callers selling Medicare Advantage plans door-to-door and the selling of other non-health-related products. Often, these salespeople wrongly told seniors that they had to sign up or they would lose their coverage. Further, the disguising of sales events as health-education seminars has also been banned.

Advocates for mental-health reform are delighted that the law provides for coverage at the same deductible level as other medical care. Those who wanted improvements for low-income prescription-drug coverage are no less happy.

Finally, if you are a military family or veteran receiving medical coverage under Tricare, the new law prevents any cuts to those services because they are paid out at the same rate as Medicare.

The AARP and the

American Medical Association

had targeted 10 Republican Senators through heavy advertising over the July 4 holiday to lobby for their votes to be changed to support the bill.

Despite this -- or perhaps because of it -- the President vetoed the bill, hoping that the renegade senators could be brought back into line and would not override him.

However, the Republican senators, who in some cases are up for re-election this year, refused to flop after having flipped and -- as we saw -- were joined by more colleagues. They, unlike the president, might have a political future after Jan. 2009.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.