Humana, the Louisville-based insurer that has aggressively and successfully signed up Medicare beneficiaries for its drug benefit plans, recently tried to recruit seniors by showing them a remastered version of the film Casablanca. But will the marriage between private plans and the Medicare drug benefit truly be the beginning of a beautiful friendship?

Earlier this year, turmoil plagued the introduction of the benefit. Now, as beneficiaries once again begin to choose private drug plans, or elect to stay put, for a second year, the program is running much more smoothly. This temporary calm disguises the key question about the future of the drug benefit: must the government pay more than it should to maintain marketplace stability? If it crimps payments to freestanding drug plans and Medicare managed care plans, it risks prompting an exodus from the Medicare market, the fate of the earlier Medicare+Choice experiment. If it doesn’t, it risks allowing the privatization of Medicare by stealth.

A year ago, low-income seniors were left without drug coverage, older Americans grappled with faulty websites, government help was erratic or nonexistent, and pharmacists griped about being paid late, or not at all. Seniors and their advocates braced for more potential problems, such as insurers that changed their lists of covered drugs after beneficiaries had enrolled.

Working closely with beneficiary groups and private plans, outgoing Medicare administrator Mark McClellan and his staff responded admirably to the initial failures. Most older Americans—between seventy-five and eighty percent--now express satisfaction with the benefit, up from thirty percent just before it was fully implemented. More importantly, few grievances and appeals about coverage decisions or marketing practices have been brought, relative to the number of claims filled. Pharmacists, for the most part, are being paid promptly. The poorest and most vulnerable Medicare beneficiaries have been placed in plans. More low-income beneficiaries who qualify for essential financial subsidies have been signed up. Most insurers didn’t substantially switch their lists of covered drugs, partly due to careful government oversight.

For the coming year, except for the very lowest-priced drug plans, premiums have fallen or risen modestly. The government website for comparing different plans is more complete and much easier to use. Most employers who offered retiree drug coverage have continued to do so. The most troublesome aspect of the benefit remains the 3-4 million seniors—about 1 in every 10 enrollees—who appear likely to fall into the coverage gap or “doughnut hole” this year. While more seniors may fall into this gap in 2007—because many were allowed to sign up later in 2006 and had less time to build up spending—more and better-publicized options for avoiding this gap exist this time around, although these carry a much higher premium and limit drug options in the gap.

For seniors and their families, these improvements bring welcome relief. But does this good news vindicate those who want to bring market forces to bear on Medicare? No, or at least not yet. Why not? Because government subsidies and overpayments currently prop up both the freestanding Part D plans and private Medicare Advantage plans that offer prescription drugs.

If freestanding drug plans lose money because their drug costs are higher than expected, the government promises to reimburse the private plans. (If profits exceed the same level on the upside, the plans have promised to return the excess money to the government.) This so-called “risk corridor” widens over the next two years and phases out altogether in 2009. While this government assumption of risk played some part in enticing more insurers than expected into offering a drug benefit last year, no one knows whether its withdrawal will prompt plans to leave. Medicare administrators expects plans to establish a firm foothold over the next couple of years, but this remains uncertain.

The second and bigger wild card is the overpayments and subsidies given to Medicare Advantage plans. According to the Medicare Payment Advisory Commission, the government paid out 11 percent more in 2006 to private managed care plans than if those beneficiaries had remained in traditional fee-for-service Medicare. This is principally because the flat per person payments to these plans are based on the cost of an average Medicare beneficiary, while managed care enrollees are younger and healthier than the norm. Left untouched, these overpayments, combined with subsidies aimed at encouraging managed care plans to enter rural areas, will exceed $60 billion over ten years. These overpayments, in turn, allow private plans to offer more generous benefits, including zero-premium and no-deductible drug benefits.

Left unchecked, these payments and subsidies will gradually tilt the playing field toward private managed care plans and draw beneficiaries away from traditional Medicare. In fact, enrollment in Medicare Advantage rebounded sharply last year, rising about 27 percent or around 2 million beneficiaries. It is expected to grow rapidly in the future. If freestanding drug plans consolidate and their premiums rise in coming years, as expected, and rising drug prices expand the size of the doughnut hole, managed care plans will become only more attractive. This seemed, on the whole, to be the intent behind many provisions of the legislation that first launched the drug benefit. (When the department of Health and Human Services recently released a new version of Medicare & You, the official Medicare handbook, that appeared to tout the superiority of private plans, this only added fuel to these suspicions.)

What’s wrong with privatizing Medicare by nudging beneficiaries in the direction of managed care plans? If plans are being overpaid, that money ought to be used for more benefits or for deficit reduction, not for drug company and insurer profits. (This point won’t only be made by deficit hawks and policy analysts. Irate physicians, who face a Medicare pay cut, will demand what they see as their rightful share.)

Second, managed care promised to save money for Medicare and to better coordinate the care of beneficiaries. This hasn’t happened. It isn’t likely to happen so long as private plans incur high marketing and administrative costs. Defenders of private plans argue that the plans offer benefits that seniors need and welcome, some of which aren’t covered under the traditional program. This is quite true. But it isn’t right to systematize a pattern of overpayment, disguised as a free market, and reward the effectiveness of the insurance lobby rather than insurers’ efficiency in providing care. (Once more beneficiaries join managed care plans, they will also resist efforts to changing the terms of payment, hurting those who remain in the traditional program.) If managed care plans continue to flourish after the government training wheels are removed, they will deserve to take a victory lap. In the interim, all bets are off.

Leif Wellington Haase is a Senior Program Officer and Health Care Fellow at The Century Foundation.