The more than two million senior citizens nationwide who signed up last year for
Medicare added the prescription drug benefit in 2006, and in most states dozens of drug plans with varying coverage are available through insurance companies. Healthcare advocates say Humana kept its prices low in 2006 to gain market share. The strategy may prove lucrative, they say, because many seniors spent considerable time researching and selecting their drug insurance and were unlikely to switch plans for 2007, despite increased premiums.
The roughly 3.5 million members in Humana's three prescription drug plans nationwide were notified by mail of the price changes by Oct. 31. Enrollment for 2007 Medicare drug benefit, called Part D, ends today.
"You have to state the obvious," said David Shove , a stock analyst with Prudential Equity Group in New York. "You sell something cheaply and get a lot of customers, and then you raise the price to improve the profitability."
Shove said the start-up of the Medicare prescription drug benefit "was a once-in-a-lifetime opportunity" for Humana to attract new customers.
Steve Findlay , a healthcare analyst with Consumers Union, the publisher of Consumer Reports, called Humana's price increases a "bait and switch" tactic.
"That's not an acceptable inflationary increase in prices," he said. "That's sucker them in and you just start raising the prices."
But a Humana spokesman, Chris Curran , blamed most of the price hike on a subsidy formula used by the Centers for Medicare and Medicaid Services, or CMS, which oversees the drug benefit. Insurance companies seeking to sell insurance under Medicare Part D submit bids to CMS and the agency uses the bids to calculate the subsidy each company will receive to help offset the cost of providing coverage. Insurers take the subsidies into account when setting premium rates.
Paul Spitalnik , a CMS actuary, disputed Humana's contention that the subsidy formula was the deciding factor in setting prices. "If a plan wanted to have a lower-priced competitive product, they needed to have a lower bid than they did for 2006 plans," Spitalnik said.
Dr. Scott Latimer , president of Humana for northern and central Florida, said that in addition to the CMS formula, price increases were also the result of higher drug costs and greater-than-expected usage by beneficiaries.
But profits may also figure heavily into the premium hikes. In presentations to Wall Street, Humana said it planned to raise its profit margin on Medicare drug plans and Medicare Advantage plans from 2.5 to 3.5 percent in 2006 to 4 to 5 percent in 2007.
Even though premiums are 130 percent higher in Massachusetts, Humana's Standard plan is still the state's second-lowest-priced Medicare drug insurance. Nationwide, Humana premiums in 2006 were the least expensive in 46 states, and will remain the cheapest in 38 states in 2007. Hardest hit are seven Midwestern and Western states, where monthly payments are going up 466 percent, from $1.87 to $10.60. The cost for Humana Standard is going down in just three states -- Georgia, Louisiana, and South Carolina.
Seniors can choose Part D plans that cover only drugs, or enroll in Medicare Advantage plans, which bundle general health insurance with the drug benefit. In 2006, about 10 million signed up for stand-alone drug coverage such as the Humana Standard plan.
The AARP MedicareRx plan, run by healthcare giant UnitedHealth Group of Minnesota, was the most popular stand-alone drug plan in 2006, with about 3.2 million members nationwide. Humana's Standard plan was second, with about 2 million members, and its Enhanced plan was third, with just under 1 million. Price increases for the Enhanced plan will average 50 percent nationwide.
UnitedHealth said the government formula can have some impact on premium prices, but that a savvy insurer can anticipate what the government will do and adjust its bid accordingly to end up with premiums priced close to company targets. For 2007, premiums for AARP's most popular plan are increasing an average of just 6 percent nationwide.
"It was our design and intention to see if we could keep the same premiums from 2006 to 2007," said Jacqueline Kosecoff , chief executive of the Ovations Pharmacy Solutions division for UnitedHealth. In Massachusetts, UnitedHealth's AARP plan premium increased 11 percent to $26.30 a month.
Under Part D, seniors who go without drug coverage will pay higher prices if they eventually decide to buy it. As a result, many seniors who did not need prescription drugs in 2006 signed up with Humana's low-cost plan simply to avoid having to pay more if they needed coverage in the future.
"Some of them took the plan even though they were only taking aspirin," said Nancy Roper , a volunteer for Action for Boston Community Development who counsels low-income seniors on drug plan choices. "Now, this jumps to $16.90 for 2007, and they're calling and asking is it worth it. It's a hardship."
Humana, based in Louisville, Ky., is one of the largest health insurers in the United States, providing medical coverage to 11 million people. The Medicare drug benefit represents an important line of new business for the company. It predicts that stand-alone drug coverage will generate between $2.8 billion and $3.2 billion in revenues this year, and between $3 billion and $3.5 billion in 2007, out of projected total revenues of $25 billion.
Advocates fear many seniors have not been as aggressive about comparing prices as they were when they signed up for 2006 coverage, causing many to stay with their current insurance, regardless of changes in costs and benefits.
"For many reasons, the Medicare population is not used to something that changes every year," said Judith Stein , executive director of the Center for Medicare Advocacy, a group that works to increase access to Medicare benefits. "Big players like Humana and AARP are likely to retain most of their membership in 2007."
The Kaiser Family Foundation released a study two weeks ago showing only one in 20 seniors enrolled in a Medicare drug plan said they would switch in 2007.
Humana's Latimer said the company expects customers will vote with their wallets if they are unhappy with the new coverage and premium rates.
"If it's not a good value, most consumers will take a look and most will change," he said.
Jeffrey Krasner can be reached at email@example.com.