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The risks of privatization in the Medicaid and Medicare programs

Increasingly, two of the largest publicly supported healthcare programs, Medicaid and Medicare, are administered by for-profit insurance companies. The privatization of the Medicaid long-term care programs has been implemented largely through state managed care contracts with insurance companies to administer Medicaid LTC funds. Medicare privatization has been similarly implemented through contracts with insurance companies in the Medicare Advantage (MA) program. Privatization, without rigorous regulation, poses a threat to the original goals of these programs—to expand access to healthcare to low-income families, children, and those living with certain disabilities in the case of Medicaid, and to protect older people from devastating financial loss by providing them with effective healthcare coverage in the case of Medicare.

Since the 1980s, for-profit corporate insurance, managed care companies, and private equity firms have increasingly recognized the potential investment value of the health and long-term care (LTC) sectors. Stakeholders are often promised the efficiency and cost-effectiveness that purportedly comes from a corporate management style. For-profits promise added value and lower costs as they pursue profits to be distributed among its leadership and shareholders. Non-profits are also incentivized to control costs; however, they differ in that they tend to reinvest funds into the organization for the benefit of the people they serve and are held accountable by the communities in which they operate. Private equity firms have no stake in the continuity of the company, beyond the initial investment.

The American LTC system is a mix of privately provided nursing homes, assisted living and community-based support services that has not received much public attention except in Medicaid budget discussions. Forty states contract with large for-profit insurance companies to run all or some parts of their Medicaid LTC programs. With the projected doubling of the population aged 70 and older over the next 30 years, there is growing concern with the assumptions made by many policy makers that managed LTC can reduce nursing home use while earning profits for shareholders.

The Health Maintenance Organizations (HMOs) have convinced state legislatures that they can reduce nursing home admissions by redirecting persons to community-based care and produce at least a 5% savings. But the home and community-based services are not program entitlements and there is little reported data on the availability of services within the states. The states have focused primarily on containing LTC Medicaid spending with little attention paid to the quality of services provided. Due to higher administrative costs and the need to generate shareholder dividends, HMO-administered LTC services could well end up costing state governments more, creating fiscal pressures that lead to rising LTC unmet needs. Florida is an example of how this has happened, with its growing waitlists of 65,000 for aging LTC services in the community and 22,000 persons with developmental disabilities.

Key to private equity’s investment growth is its short-term, high rate of return strategy of buying businesses, steering a rapid pace of change that is supposed to improve performance, and then selling them at a profit to investors. They have become major investors in health care, especially MA, and in Medicaid-funded long-term care over the past decade. A recent studyshows that private equity buyouts of nursing homes have resulted in major reductions in quality of care, as measured by the federal five-star ratings and in hospital readmission rates, possibly because of reduced staffing.

A recent study shows that private equity buyouts of nursing homes have resulted in major reductions in quality of care, as measured by the federal five-star ratings

The Medicare program is also increasingly being privatized with over one third of beneficiaries currently enrolled in MA plans. These plans are designed to attract consumers by offering traditional Medicare benefits plus additional benefits like prescription drugs, dental, vision, and gym memberships. MA enrollees, on average, have lower premiums and cost-sharing compared to traditional Medicare beneficiaries. Questions, however, remain about how MA plans are using the risk-adjusted per-enrollee capitated payments and quality bonuses to provide care.

The stated goals of the MA program were to use private plan alternatives to increase choice and reduce cost without diminishing the quality of care received. However, many enrollees find themselves in plans with narrow networks of providers and face inappropriate denials for care, raising questions about the program and its ability to provide quality care. MA plans were supposed to take on higher morbidity beneficiaries, yet a consistent finding is that MA enrollees are healthier than traditional Medicare beneficiaries. It’s unclear if private Medicare plans have achieved their goals largely due to a lack of encounter data and enforcement of plans’ contracts with the Centers for Medicare and Medicaid Services (CMS).

Why has privatization in America’s two largest publicly funded programs, Medicare and Medicaid, proceeded over the last several years in the absence of rigorous and consistent regulatory oversight? This should be a high priority concern for the Biden Administration and the leadership of CMS as they work to ensure that taxpayers and beneficiaries are well served by these essential programs.

Featured image via Getty Images.

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