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Television advertising may be a sign of Medicare’s growing market concentration (2 of 2)

In late 2005, Fred and Ethel began promoting Pacificare’s Part D plans in a nationwide television commercial. The advertisement included a clip from the iconic 1950s television show I Love Lucy, and in the dubbed 2005 version Fred and Ethel chatted about the affordability and low premiums of Pacificare’s plans. For the millions of seniors who recall the 1950s as an idyllic era, the ad may have brought smiles.

A few Medicare advocacy groups criticized the ad, believing it would attract people to enroll in Part D plans that could turn out to be expensive choices, depending on the drugs they took. They had a point. Choosing a Part D plan or a Medicare Advantage plan because you’ve seen a clever television commercial makes as much sense as choosing a surgeon because you’re impressed by his flashing neon sign near the building where he practices.

When retirees enroll in plans based on television commercials, the chances are fairly good that they’ll wind up with coverage that is either too expensive or does not give them adequate protection. But television commercials and brand name advertising are the preferred ways of marketing for Advantage and Part D plans. Typically they emphasize a plan’s low premiums or if it’s an Advantage plan, the extra benefits it offers. The ads feature spokesmen who invite people to call a toll-free number for help in finding the plan that’s best for them.

Retirees are reassured by a trusted brand, a familiar name or an effective ad. To gain brand-name recognition among seniors, larger plans sometimes jointly sponsor plans with famous-name firms. Last year, for example, Humana announced a co-branding agreement with Reader’s Digest, which was among the country’s most popular publications in the 1950s and is also read by many of today’s retirees (currently it has a circulation of 5.5 million, ranking sixth among the country’s magazines). Humana-Reader’s Digest offers Advantage plans in seven states and Medigap plans in 37 states.

In addition to its Reader’s Digest affiliation, Humana co-sponsors two national Part D plans with Walmart, the nation’s top retailer. The heavily advertised Humana-Walmart Part D plans, which are less than two years old, already account for more than 10% of Part D stand-alone plan enrollment. Humana also has other Part D plans, and its market share, boosted by the Humana-Walmart plans, has climbed back to roughly 15%, according to an issue brief by the Kaiser Family Foundation. The share had been as low as 11.6% in 2010. Despite their emphasis on low premiums, however, Humana-Walmart plans are sometimes high-cost choices for retirees.

If consumer marketing for a product is chiefly through television and national print media, larger companies with publicized names enjoy tremendous clout. A firm that has annual income of $1 billion or more can easily justify the millions spent to saturate the airwaves prior to and during Medicare’s eight-week annual enrollment period. As the Advantage and Part D markets slowly become more concentrated in the hands of a few insurance companies, costs for retirees will be constrained only by Congress and Medicare, which try to regulate how much companies can charge. But regulations don’t protect retirees from poor choices when they opt for expensive plans instead of lower-priced ones with superior benefits and reduced risk.

Ownership is most strongly concentrated for Advantage plans. According to the Kaiser Family Foundation’s 2012 Data Spotlight, three or fewer firms control more than one-half of the Advantage market in 49 states (New York is the exception). Moreover, in 35 states three or fewer firms account for at least 75% of Advantage plan enrollment.

Last year the Government Accountability Office (GAO) issued a report that evaluated the county by county bids for more than 2,100 Advantage plans, comparing them to each county’s fee-for-service costs. A bid is an insurance company’s offer to provide service in a given county for a certain amount per person for the coming plan year (four months ago companies submitted bids for the 2013 plan year).

The GAO report found higher plan bids relative to fee-for-service costs in areas with greater market concentration. In counties where more than 50% of the market was controlled by three insurance companies, the predicted bids were highest. The GAOa also concluded that the higher the concentration, the greater the discrepancy between the bid amount and the county’s fee-for-service costs.

The report’s findings may mean (among other things) that people in Advantage plans owned by the dominant companies are less likely to switch to lower-premium choices, even though they can save money and get improved benefits by doing so. It may be that they prefer to stay with a widely advertised plan with name recognition, or that they don’t want to change doctors and networks.

Part D sponsorship is not as greatly concentrated, possibly because it may take a decade or two for smaller companies to be absorbed by larger ones. Advantage plans (and their predecessor managed care plans) have been consolidating ownership for two decades, but Part D plans are not yet seven years old. Today the top three Part D insurers nationally have only 48% of enrollment, slightly down from 50% in 2006. But even though the top three’s share hasn’t grown, plan ownership is gradually being centralized in four or five companies.

When Pacificare was running its Fred-and-Ethel commercials, for instance, it was being acquired by UnitedHealthcare in a $9.1 billion deal that put UHC in the top spot for Part D enrollees, a position it holds today. Newer players, meanwhile, have jumped into the top five, with CVS Caremark and Express Scripts doing so through acquisitions.

Even when markets are well regulated, concentration results in higher prices. That’s especially true in cases where consumers do not have the necessary information to make cost-effective choices. Last year a Health Affairs study of hospital costs, an area where retirees do not have access to good data, found that the hospitals who had the greatest market concentration raised prices the most. In areas where costs can be easily compared – new cars and grocery store items – prices are less likely to be inflated. And in markets where costs cannot be easily compared except by experts – fine jewelry, for instance – people tend to overpay.

Medigap policies are the most transparent and easily understandable type of supplemental coverage for retirees, and studies have indicated that their premiums are reasonable once you factor in the comprehensive benefits they provide. Some of the larger plans have medical loss ratios that approach 90%, and while there is concentration in the Medigap market, so far it has not resulted in overly expensive outcomes for people with policies from the dominant Medigap insurers. Even with Medigap policies, though, there exceptions to the large-company preference, and there continues to be substantial variance in the premiums of plans that provide identical coverage. Unwary consumers are at risk in almost any type of coverage if they don’t compare costs before they buy. ◊◊

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