Below we are featuring a compact and highly readable study by the Private Equity Stakeholder Project, How Private Equity Gets Its Cut from Medicare Advantage, by Mary Bugbee (mary.bugbee@pestakeholder.org). We have had to omit the cover page so the document would be small enough to upload.
This paper is useful since it describes some of the Medicare Advantage abuses, explaining how various rentiers game the program, including outright fraud. After explaining the common types of extractive behavior, and making clear they are serious. Improper payments, according to the CBO, approximately 10% of total payments to Medicare Advantage Organizations, as in insurers that have contracted with Medicare to offer Medicare Advantage plans. And as the study explains, this isn’t the only place fraud occurs. Broker schemes to get paid well over their supposedly regulated commissions and mis-selling of plans are also common abuses.
The post points out that private equity is not at the heart of this ecosystem; giant health insurers dominate. But private equity has a solid and growing toe-hold in providing some Medicare Advantage services to insures, and also operating in niche insurance markets, mainly by running HMOs in geographically distinct markets.
Perhaps readers are familiar with the workings of Medicare Advantage will find the mechanics of these scams to be old hat, but some were new to me.
Upcoding is one of the big schemes to overcharge. Medicare pays more to Medicare Advantage plan for patients with chronic conditions, as well as “dual eligible” such as eligible for Medicare and Medicaid. As the report drily notes:
It also means that insurers can game the risk adjustment system by colluding with providers or contracting with in-home health assessment companies to add more diagnostic codes to a patient’s medical record in order to receive a higher payment
Admittedly, this con takes a bit of work. The New York Times reported in 2022 that eight of the ten biggest insurers engaged in flat out theft via overbilling and other fraud.
We’ve commented often about how solicitation costs, particularly for TV ads and in-person selling (think the Big Pharma reps that call on doctors) are an important reason American medicine is so unnecessarily expensive. Drug companies spend more on marketing than R&D. Similarly, if you watch any old people TV, you’ll be subject to a barrage of both ads for meds, and at Medicare Advantage times of year, plan hucksters.
Brokers shamelessly game the fixed commission rules. Again from the article:
The various players within the senior insurance distribution market, composed of brokerage firms, marketing companies, and independent agents, have much to gain from enrolling seniors in private Medicare plans.
Brokerage and marketing agencies provide the types of administrative, technology, and marketing support that licensed brokers need to facilitate enrollment of beneficiaries in Medicare Advantage plans. Both brokers and the agencies with which they work contract with multiple insurance companies and earn commissions and other types of payments when they enroll individuals in
a particular plan. As the Commonwealth Fund explains, “[Independent agents and agencies] represent both plans and beneficiaries, with compensation tied exclusively to enrollments with contracted insurers. As a result, agents may find themselves choosing between their income and beneficiaries’ needs.
That is a polite way of saying brokers have incentives to steer patients to crappy plans that pay higher commissions. This sort of bad behavior has long been endemic in the money management industry. Back to the study, which then describes how payments to brokers and marketers are goosed up, making a joke of the pretense of fixed commissions:
The Centers for Medicare and Medicaid Services (CMS) sets maximum broker commission payments, but according to the Alliance for Community Health Plans, “there are no limits on creative add-on fees such as referral payments, marketing, administrative expenses, bonuses and incentives for completing a health risk assessment. As a result, brokers often collect more than double broker commission limits, totaling billions of dollars each year that could be used to enhance care or extend the Medicare Trust Fund.
The study then as a series of case studies on badly-behaving private-equity-owned players, to give another window into how the scamming works.
Admittedly, the Biden Administration has roused itself, and in 2022, CMS issued some sensible new regulations. A summary:
- Requiring CMS review of all prospective television advertisements.108
- Requiring insurance companies to have greater oversight over the third parties with which they contract.109
- Requiring that the relevant insurer must be identified in the advertisement of specific plans.110
- Prohibiting the marketing of plan benefits in areaswhere those benefits are not available.111
- Updating the audit process to help recover improper risk adjustment payments made to Medicare Advantage plans.
And, in November 2023, CMS proposed a new rule that aims to address overcompensation and contract terms for agents, brokers, and third-party marketing organizations that have led to individuals being steered into plans that are not in their best interest
Sadly, even though this is a good set of reforms, the article describes how enforcement will be weak unless those efforts are well funded, and how these measures could be rolled back by future administrations.
As we have discussed often in our considerable work on private equity, general partners are established masters of tricky practices that create “heads I win, tails you lose” outcomes, such as (literally) fees for nothing, unwarranted clawbacks, schemes to avoid paying refunds, and shifting risk on to other parties. So this discussion of additional is important; I particularly like joint and several liability:
PESP has private equity-specific recommendations that address some of the common issues seen with private equity investments in healthcare companies:
1. Prohibit or Limit Dividend Recapitalizations
– Require private equity and other corporate owners to refrain from indebting newly acquired companies in order to pay shareholder dividends. To the extent dividend capitalization is allowed, limit dividends to a percentage of profits.
2. Joint Liability for Portfolio Companies – Require joint and several liability for private equity owners and portfolio companies. This would mean that if portfolio companies were sued for violations of the False Claims Act or other alleged illegal behaviors, the private equity owner could be held liable as well.
3. Greater Antitrust Enforcement – Because private equity rollups and mergers typically fall under the radar of antitrust regulation,115 the Federal Trade Commission (FTC) and the Department of Justice (DoJ) should scrutinize healthcare deals involving private equity firm owners even if individual deals do not meet the typical threshold to trigger FTC review.
Sadly, the complexity of medical insurance plans, and the disgrace of obfuscatory billing makes Medicare and Medicare Advantage plans easy targets for cons. But we’ve come to expect that sort of thing from financial services industry players; Elizabeth Warren long ago talked about tricks and traps designed to ensnare consumers. Worse is that medical providers, from hospitals to MD practices, have become happy partners in these crimes.
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