Updating private insurance options in Medicare

Reihan Salam has a nice post looking more closely at the cost of the current Medicare Advantage program and describing how premium support with competitive bidding in Medicare could work better to lower costs. He quotes Ezra Klein as saying competition hasn’t worked well to hold down costs in Medicare, and Reihan rightly points out that the way in which Medicare Advantage plans are paid by Medicare muddles this story. I would restate what Ezra said as private insurance options in Medicare have not worked well to hold down costs in Medicare. And it has everything to do with how Medicare Advantage plans are paid by Medicare.

Reihan notes that currently there is a county level benchmark that serves as the basis for how much Medicare pays private insurers who offer Medicare Advantage (MA) plans (if a plan offers a premium that is lower than the benchmark, patients get a rebate; if higher, they must pay the difference). So, there could be some competition in MA, but it is set around an administratively set payment. It is important to note that the county-level benchmark levels are based on historical Medicare Fee cost of Medicare in a county.

For the early history of private plans in Medicare (starting around ~1982, I believe implemented via a TEFRA 82 demonstration but I can’t dig it up right now) the payment levels from Medicare to private insurers were set at 95% of the average adjusted per capita cost of FFS Medicare in a given county. This did not save Medicare money because it turned out that generally healthier persons choose private insurance options, and were beneficiaries who would have cost less than 95% of the average cost in their county had they stayed in FFS Medicare. As you might guess, private plans proliferated in high cost areas, and often didn’t offer coverage in low cost ones. Payment rates from Medicare to private plans were boosted over time, with a goal of stimulating private insurance options and enrollment in same. Per MEDPAC on the current benchmark:

The benchmark is a bidding target. The local MA benchmarks are based on the county-level payment rates used to pay MA plans before 2006. (Those payment rates were at least as high as per capita FFS Medicare spending in each county and often substantially higher because the Congress set floors to raise the lowest rates to stimulate plan growth in areas where plans historically had not found it profitable to enter.)

The primary reason I have changed my mind and am willing to support a move toward a comprehensive competitive bidding option in Medicare (so long as it is in conjunction with implementing the ACA or a broader deal) is that I believe that private insurance options in Medicare will never go away for political reasons, and that the current MA approach systematically over-pays private insurance companies. Given my understanding of reality, competitive bidding has a reasonable chance of improving on the current (and longstanding) overpayment to private plans. Further, if we are going to do this, I see no reason to wait 10 years to start, especially given movement ahead on setting up insurance exchanges via the ACA, since the infrastructure necessary to implement both are similar. Perhaps a policy of saying competitive bidding in Medicare can start 2 years after a state sets up an operational ACA exchange could provide some incentive for “cold feet” states to move forward.

cross posted at freeforall

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

10 thoughts on “Updating private insurance options in Medicare”

  1. “I believe that private insurance options in Medicare will never go away for political reasons”

    In 2004, the GOP had an anti-gay-marriage ballot measure in Oregon on the November ballot in order to mobilize the conservative vote down-ticket (in addition to similar measures in many less liberal states for the same reason). By 2012, the GOP anti-gay-marriage amendment in North Carolina was on a primary election ballot because it would’ve lost in the general election. Historically, what’s politically possible changes much more quickly than people imagine it will.

    We piss away about a trillion dollars a year as a nation by spending twice as much on health care as we need to. We could adopt one of many national healthcare systems from a country quite similar to our own and solve 90% of the long-run deficit problem overnight. This is by far the largest chunk of national expenditure (public + private) that can be reduced. Doing so would definitely hurt a few in the short- and medium-term, but it’s the only realistic way to keep our revenues about as low as they are. At some point, the large number of rich folks who like low taxes are going to turn on the much smaller number of rich folks who profit from American health care inefficiency, because that’s the only money that’s on the table.

    1. Fair point that what is possible can change over time. I would stick with my prior that we won’t get rid of some type of option in Medicare (1 in 4 seniors now covered in Med Advantage). Also, FWIW I doubt seriously Amendment 1 would have lost in the general….the Dems who voted to override the Gov veto on it insisted it be in primary, I think the lessen the tension between different groups of Dem voters in NC in general election.

  2. “We piss away about a trillion dollars a year as a nation by spending twice as much on health care as we need to.”
    Freedom, as we are frequently reminded, isn’t free. And that’s what we’ve got, compared to the OECD countries. Not better health outcomes, certainly, or more people covered….

    We’re getting something for all that scratch, aren’t we? We have to be….

    1. But, Davis, surely you don’t want to risk falling prey to Invisible European Health Cooties?

  3. Do we know enough about the design of market institutions to create effective results in bidding situations where some or all of the participants are not bidding in good faith? The past 15 years or so of experience with utility deregulation, high-frequency trading, “asset”-backed securities and swaps of many kinds suggest that designers of bids have been taking believers in efficient markets to the cleaners. If we avoid regulatory capture, one might be able to micromanage the bidding and plan-design process well enough to get around this problem, but even then, how useful would the result be? It’s not even clear to me that the insurance plan is the right level of granularity to be attacking most of the cost issues in modern medicine.

    1. My faith in the market’s marvelous efficiency took a real beating when I began to look at the Department of Defense procurement systems – or, realistically, lack thereof. In theory, competitive bidding is fine – until cartelization sets in.

      1. The biggest non fiction is 218 votes in House, 60 in Senate and 1 in White House. That is what it takes to do anything. There is no perfect plan and we certainly don’t have a perfect political system….the only hope is to muddle towards improvement run through the lens of what is politically possible. We will not get rid of private plans in Medicare, and the way we do it now almost certainly over pays, so there is a chance this could be better.

    2. The biggest question is if private insurance options in Medicare no longer have a benchmark bidding target around which to offer bids (that is based on FFS spend levels in the county and other things) will they actually bid? I suspect we will find that in large parts of US they will not, and FFS Medicare is only option. There will likely be some areas it could work. Another issue is whehter they (plans) will bid on price or will they essentially collude on price and market themselves on other factors. No one really knows. I think worth a try since I think private options are inevitable, and they are now overpaid….if you don’t think private options inevitable it could change your view. In fact, I would offer this deal in one second: (1) competitive bidding in Medicare to begin 2 years after any state undertakes full Medicaid expansion and sets up an insurance exchange per ACA. Use ACA experience to inform Medicare exchange. (2) press case that if comp bidding so great, and problems so vast, why wait 10 years? that is the least brave thing I have ever heard of.

      This longish post points out a key area that would have to change for competiitive bidding to have a chance of working http://donaldhtaylorjr.wordpress.com/2012/08/16/how-would-hospice-fare-under-medicare-premium-support/

      1. My guess is that they will include poison-pill extras in the plans they bid, or otherwise work on cherry-picking the people they enroll and retain. Even a small difference in modeled vs real morbidity and mortality could make a huge difference in profit.

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