Insurers reap profits on Medicare investments

(AP) - Private health insurance plans catering to Medicare recipients are making millions by taking money the government sends in advance - but isn't immediately needed - and using it to make investments, federal investigators say in a report obtained by the Associated Press.

In financial parlance, it's called “playing the float.”

Medicare typically pays private Medicare Advantage plans 46 days before they need the money to cover medical services.

An audit by the Health and Human Services' Inspector General's Office estimates that the plans collected $376 million in investment income on those advance payments in 2007, the latest year available.

Of 50 plans audited, only two told investigators that they subtracted investment earnings from their Medicare bids for the following year. The rest pocketed the money.

“Because federal requirements governing the Medicare Advantage program do not limit the ability of (private plans) to retain investment income earned on Medicare funds, the Medicare program loses potential cost savings,” said the inspector general's report to Medicare administrator Donald Berwick. The report is to be released today.

How much is Medicare losing in potential savings?

If Medicare had hung onto the money for a few more weeks, the program's trust funds could have collected $450 million in interest income from the Treasury, auditors estimated. That's because the long-term Treasury securities Medicare invests in typically pay higher interest than short-term investments in which the insurance companies park their money.

About one-quarter of Medicare beneficiaries are signed up with private insurance plans that include such industry giants as UnitedHealthcare, Humana and Blue Cross Blue Shield plans.

Medicare Advantage plans typically offer lower out-of-pocket costs than traditional Medicare.

By law, Medicare pays premiums the first day of the month, even if the plans won't actually need the money for weeks. Medicare says it can't change the date without getting Congress to sign off.

Inspector General Daniel Levinson said there's another way - issue a regulation that requires insurers to reduce their annual bids by the amount they expect to receive from investment earnings.

Berwick asserts most of the potential cost savings would be wiped out because private insurers would simply increase their bids to recoup the lost investment income. The move also could backfire if the plans start demanding interest on any funds that Medicare owes them.