Medicare Competition Gets a Fair Shake

The 2012 presidential election was perceived (at least by those on the left) to be a referendum by voters on health care policy. Indeed, Democrats enacted what is arguably the biggest health care reform since 1965 - when Medicare and Medicaid were created - in the form of the ACA, or Obamacare. It wouldn't be a stretch to say that Republicans lost the election, at least partly, because of a lack of a coherent policy geared at repairing the broken American health care system (though it also isn't a stretch to say that Obamacare does not fix the broken health care system). Yet, it might be wise not to throw out the baby with the bathwater - one important Republican reform idea, most recently proposed by Representative Paul Ryan, is receiving some well-deserved traction.

Medicare's payment advisory commission - MedPAC - recently released a report addressing a number of growing challenges in the Medicare program. Chief among them (and the first chapter of the report) is the recognition that Medicare fee-for-service (FFS) is likely not the most efficient and cost-effective way to cover the care that beneficiaries will need. The alternative approach to the standard FFS model is essentially what Paul Ryan and other conservatives have been promoting for some time - premium support. Although MedPAC (understandably) doesn't adopt the premium support moniker (instead referring to their model as "competitively determined plan contributions" or CPC), the structure is very similar to what we saw in Ryan's proposals.

At its core, the premium support model injects about as much private sector competition as could be imagined into the Medicare program. Ryan's version of the model would have private plans - ostensibly, those that provide coverage through the Medicare Advantage program - compete with Medicare FFS on a cost basis. The benefit structure would be pre-defined by law, and the Medicare program would provide beneficiaries with vouchers (pegged to the second-cheapest plan in their region) that they could use to purchase Medicare-equivalent coverage. Any cost above the voucher would be borne by the beneficiary. Private plans would compete with Medicare FFS for members, and in the end, whichever program could pay for the same benefits at lower costs would come out on top.

For all the criticisms that Ryan's premium support proposal received, it isn't the first time the idea was considered. First off, the idea goes back to a 1995 proposal by Brookings Institution scholar Henry Aaron. The premium support model also received play in the Domenici-Rivlin proposal to reduce the nation's debt.

But the idea of injecting more competition into Medicare is more than just volumes of failed legislation - the program has experimented with competition already. Medicare Advantage, an alternative Medicare funding arrangement already allows Medicare beneficiaries to purchase private coverage using Medicare dollars. (It should be noted, however, the MA is not, in and of itself, a competitive program, and the report notes that MA costs are tied more closely to FFS costs and are largely unrelated to the commercial market.) The difference is that payments to MA programs are based on regional administrative benchmarks tied to FFS costs; plans bidding below the benchmark receive rebates which are used to either offer additional benefits or reduce premiums; plans bidding above have to charge enrollees additional premiums. Moreover, MA plans don't compete with FFS in the full sense of the word - beneficiaries that choose to go with FFS face no penalty if the cost of providing FFS benefits is greater than the cost of providing MA benefits (although MA plans generally cost more per-beneficiary than FFS does, there are important nuances - for instance, MA patients tend to have shorter hospitalizations, even though their health status is comparable to those in FFS).

In MedPAC's discussion of CPC models, the authors note that fundamentally, differences between CPC models depend on how the federal contribution is calculated. They present three illustrative scenarios:

1)      Federal contribution is 100% of local FFS costs. Under this approach, the federal contribution is tied explicitly to FFS spending. This ensures that no plan would get reimbursed more than what FFS would spend for a particular beneficiary.

2)      Federal contribution is based on a weighted average of local FFS costs and local bids. Because the contribution would be based on both FFS and private plan bids (FFS competes directly with plans), low-spending areas would see higher plan bids (resulting in higher contributions) while high-spending areas would see lower plan bids (and lower federal contributions).

3)      The final option takes the lesser of FFS costs and private plans. FFS does not compete directly with plans under this option, but this results in the lowest cost of reimbursing private plans. The low-use / high-use dynamic from the second option is still in play, however, but no matter what, contributions could never become greater than FFS costs.


MedPAC's analysis reveals an interesting dynamic in how competitive bidding may play out - the structure of the federal contribution can essentially act as a transfer mechanism from FFS beneficiaries to those who choose to participate in private plans. The model that reduces federal contributions the most - the third scenario from above - also results in the greatest premium increases across the board, for FFS beneficiaries and those who enroll in private plans.

However, the authors of the report offer additional considerations. A CPC-based Medicare reform may choose to allow variations in benefits (while maintaining an equivalent actuarial value as Part D does) for instance, which would allow plans to better tailor benefits to particular populations or regions. The question of an administrative benchmark is also salient, especially with regard to political feasibility - prior CPC demonstrations were shut down largely because stakeholders opposed the elimination of benchmarks.

But perhaps one point in particular deserves some attention - high-use areas (big cities, generally) can see substantial benefits from greater competition: FFS use in Oklahoma City, for instance, is 16 percent above the national average; MA HMOs bids, according to MedPAC's analysis, are 8 percent lower. Yet, in low-use areas, the reverse is true. The explanation offered, and it is fairly convincing, is that MA HMOs tend to have somewhat higher administrative costs in order to better coordinate care - these fixed costs are more easily offset in high-use areas making it easier to compete with FFS on cost.

Fundamentally, injecting more competition into Medicare may work in some areas and not work in others. But that's the beauty of competition - the plans that can't compete with FFS shouldn't be expected to enter the markets where they can't. But if they can, indeed, offer significant benefits in high-use markets, CPC-based reform should be on every policymakers wish list.

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