The cuts could range up to about $27.6 billion over five years, an amount the industry says would reduce the number of managed care plans serving seniors and the disabled.
Under traditional Medicare, health care providers bill the government for the services they perform. But with "Medicare Advantage" managed care, the insurers get a set amount per person. Then, the insurers reimburse the people who provide the care.
Many health care experts believe that managed care leads to a greater focus on prevention and better coordination of services. And this focus, with an emphasis on providing only the care that's necessary, saves money for taxpayers and patients.
But Democrats suggest the insurers are more interested in making a profit than in saving taxpayers money. The incentive to keep costs low also gives insurers an incentive to scrimp on care, the Democrats say.
For years, Democrats have said the Republican-led Congress intentionally overpaid insurers so they could offer lower costs and more benefits than are offered through traditional Medicare.
"We have strong evidence now that there are very, very large overpayments to insurance companies," said Rep. John Dingell, D-Mich., who will probably serve as chairman of the House Energy and Commerce Committee.
Dr. Mark McClellan, who oversaw the Medicare program until just last month, said the payments to insurers make the program more affordable to beneficiaries. Their premiums would go up if the government subsidies went down, he said.
He also said that the plans offer patients the promise of more effective care than they get through traditional Medicare. For example, many diabetics in managed care undergo aggressive counseling and testing of their blood sugar levels to help them avoid costly complications down the road, such as kidney disease or stroke. They often don't get that kind of coordinated care in the fee-for-service setting, he said.
"It would be a real shame for beneficiaries in Medicare not to have access to that," McClellan said.
Currently, the government pays about 11 percent more for a patient in managed care than when a comparable patient is in traditional Medicare, says an independent advisory panel established by Congress.
The higher reimbursement rate for managed care shows that insurers are profiting at the taxpayers expense, Democrats say.
"Much like Iraqi weapons of mass destruction, the purported Medicare Advantage cost reductions don't exist," Rep. Pete Stark of California said in the summer. Stark oversees health care issues for Democrats on the House Ways and Means Committee.
The same independent panel, the Medicare Payment Advisory Commission, recommended lowering the reimbursement levels for managed care so that the rates would be the same as the fee-for-service program. Many Democrats want to act on that recommendation, which would save about $18 billion over five years.
The commission's work is often cited by lawmakers from both parties. It says that overpaying for health care is a mistake.
"Organizations are more likely to be efficient when they face financial pressure," the commission said.
The insurance industry counters that the payment gap varies by region. In urban areas, the payments for managed care are comparable to fee-for-service. It's in rural areas where the difference is most dramatic, said Karen Ignagni, president and CEO of America's Health Insurance Plans.
But that is by design, she said. Medicare also has a subsidy for rural hospitals. If it didn't, then there would be fewer hospitals in rural parts of the country. The same concept applies to insurers.
If the payments are lowered, she said, "there would be a contraction of choices, and members of Congress have worked very hard to get choices in those areas."
Overall, the commission's recommendations would trim about $27.6 billion over five years, the Congressional Budget Office has estimated. That's out of about $300 billion that would go to managed care companies over that time.
Insurers get only a portion of that funding. Most of the money is passed through to the health care providers they contract with.
The payment to insurers that Democrats will target first is what they call the insurers' "slush fund." The fund, officially called the regional stabilization fund, ensures that certain managed care companies called "preferred provider organizations" offer their services widely.
Eliminating the fund, which has yet to be tapped, would save about $6 billion over five years.
Health and Human Services Secretary Mike Leavitt said the Bush administration opposes doing away with the fund.
"We believe there is still an ongoing need for it to be there," Leavitt said.
Privately, lobbyists for the insurance industry acknowledge there's a good chance the stabilization fund will meet its demise soon, particularly because lawmakers want to avert a 4.5 percent pay cut for doctors next year. Avoiding the cut in physician payments will cost more than $10 billion annually. Lawmakers are looking to trim other parts of the Medicare budget to help pay for it.
"There's a lot of money rattling around out there. The question is, who's going to get it," said Sen. Edward M. Kennedy, D-Mass.