Pro-Competition vs. Pro-Business
Jay Greene of The Detroit Free Press (h/t Kaiser Health News) reports,
The regulation — which establishes a competitive bidding process for companies that provide medical home equipment to Medicare patients and also limits the number of companies under contract — could drive out of business up to 90 percent of the roughly 500 Michigan home health supply vendors. …
Last year, Serra [vice president of Henry Ford Health Products] formed a grassroots organization of 85 hospital-based home health suppliers — the National Hospital Coalition on Durable Medical Equipment — to lobby for changes in CMS rules or possibly to seek federal legislation to change the regulations. …
Medicare’s competitive bidding program, which was mandated by Congress in 2003 and later modified in 2008, is intended to save Medicare more than $1 billion annually.
In an interview, a Medicare official who declined to be named said hospitals and doctors have an exemption that allows them to bill Medicare outside contracts for certain products, including walkers, infusion pumps and home glucose monitors, if patients require the equipment immediately.
Medicare Advantage Competitive Pricing: The Political Failure of a Good Idea
This is a re-post of my most recent Kaiser Health News column.
Few Americans should be satisfied with the way the government pays private health insurance plans that participate in the Medicare Advantage program. Taxpayers pay 14 percent more to insure a beneficiary through the Advantage program than through traditional, fee-for-service Medicare, the program’s “public option.” The new health reform law–the Affordable Care Act–will reduce, but not eliminate, the additional payments to Advantage plans. Medicare beneficiaries are concerned about the reductions in Advantage plan availability and generosity that will result from those payment cuts.
There should be a better way to pay Advantage plans, one less likely to be a taxpayer rip-off or to contribute to swings in plan availability and generosity. In fact there is, and Medicare’s prescription drug program uses it successfully: competitive pricing (also called competitive bidding). Under a competitive pricing system plans bid their price to provide a standard set of services. The amount the government pays a plan reflects bids offered by all competing plans (e.g. payments are set to the average bid).
The critical component missing from the Advantage program is payments related to bids. Instead, payments are based on a formula established by Congress. The differences between this “administrative pricing” system and competitive pricing are related to taxpayer and beneficiary dissatisfaction with the Advantage program.
The effort to bring price competition to the Advantage program is a long story of health plan opposition and political failure. Nevertheless, if it were allowed to function, a competitive payment system has the potential to take politics out of pricing and result in lower volatility in payments, Advantage plan participation and benefits.
Congressional meddling has become almost synonymous with Advantage administrative pricing. Payment rates are political tools used as means of compromise or to extract concessions. They’re also a source of revenue. Payments go up when it benefits certain members of Congress. Payments go down when money is tight and other expenses take priority. The system may benefit politicians, but it disadvantages the rest of us (insurance companies excepted).
Under a competitive bidding structure, changes in payments, plan participation and generosity of benefits would be related to changes in cost. Though costs increase, with bid-based payments the large and disruptive changes imposed by the congressional tinkering of administrative prices would be things of the past. The economic efficiency would benefit taxpayers, and the consistency would be a welcome relief to beneficiaries.
Politicians have tinkered with Advantage payments by increasing them for plans in historically underserved rural areas. The disproportionate power of senators from rural regions helped promote and maintain administrative pricing and the higher rates it can deliver to the areas they represent.
Thus, it was a great surprise when the Senate’s health reform bill included a provision for Advantage plan competitive pricing. Those of us who study Medicare and are close observers of the political process were stunned. Not only had 60 senators, including many from states with large rural regions, agreed to real price competition but they did so despite decades-long industry resistance to anything of the sort. The Senate bill then passed the House and was signed by President Obama. For a brief and glorious week a more sensible Advantage program payment system was the law of the land.
Then the budget reconciliation amendment was passed and signed, and with it administrative pricing returned. Why in the final hours of negotiation over health reform had the Democrats axed competitive pricing? Wasn’t the disproportionate representation of rural senators the big hurdle, one that it had already overcome? Sadly, in this case, the Senate’s judgment was not decisive.
There are three potential reasons why lawmakers purged competitive pricing at the last minute. First, the key difficulty in the final days and hours was not in satisfying rural senators but in satisfying reluctant representatives. And the House had already passed an update to the administrative pricing Advantage program payment scheme as part of its health reform bill.
Second, perhaps a few House holdouts wanted assurance that insurers and beneficiaries in their districts would be taken care of. When the problem is one of convincing fence-sitting politicians, one enters the conversations with money in hand, not a vague promise of an efficient market.
Finally, complying with the Congressional Budget Office’s criteria, in order to receive a favorable score, was paramount. Price competition is complex for CBO to score and more difficult to tweak to wring out the last few billion dollars to make the numbers. Administrative pricing, on the other hand, is relatively easy to score and to adjust to hit a budget target. Adjusting the administrative pricing system may have been a key element of conversations between the Democrats and CBO in the frantic final hours of negotiation.
Until the inside story of health reform politics is written we may not know the truth about how Advantage program competitive pricing passed the Senate or why it was overturned. But one thing is clear: the politics of Medicare is a cruel sport in which the failure of good ideas is common. The upshot of the rough-and-tumble, however, is that taxpayers and beneficiaries receive the hardest blows.
The Political Failure of a Good Idea
My Kaiser Health News opinion column is posted today. It begins,
Few Americans should be satisfied with the way the government pays private health insurance plans that participate in the Medicare Advantage program. Taxpayers pay 14 percent more to insure a beneficiary through the Advantage program than through traditional, fee-for-service Medicare, the program’s “public option.” The new health reform law–the Affordable Care Act–will reduce, but not eliminate, the additional payments to Advantage plans. Medicare beneficiaries are concerned about the reductions in Advantage plan availability and generosity that will result from those payment cuts.
It then continues to explain how a competitive pricing payment system–the one that would have been established by the Senate health reform bill–could address concerns of both taxpayers and beneficiaries. Sadly, such a system was only law for a week. The budget reconciliation amendment replaced it with administrative pricing, the very type of system that has caused so much trouble in the program.
Interested? Read the whole thing.
What Does Health Reform Do To Medicare Advantage Payments?
Co-blogger Steve and I, as well as some of our colleagues, were hoping that health reform would finally bring competitive pricing (or bidding) to Medicare Advantage (MA). It won’t, though it nearly did. That’s very disappointing and possibly not a good thing for beneficiaries, the program, or taxpayers.
Competitive pricing seemed a lock when the Senate bill appeared to be the only one that could pass both houses. Unlike the House bill, it called for MA plans to compete on price. Of course today it is the law of the land. But the budget reconciliation amendments will undo competitive bidding and replace it with a modified version of the existing administrative pricing system (which sets MA payments by fiat) <sigh>.
The new MA payment system is hard to understand from the legislative text. The various summaries on Nancy Pelosi’s website explain it succinctly, though leave out a few important details. Colleague Roger Feldman went to the trouble of producing a summary superior to these other source, which is the basis for the following.
In 2011 government payments to MA plans will be fixed at 2010 levels. In 2012 payments will be a 50/50 blend of the current levels and a “benchmark” obtained via a new formula. In subsequent years payments will also be a of blend current and new levels but one that gradually includes more of the latter so that by 2018 all plans are paid according to a new benchmark formula. That formula will be the product of local per beneficiary costs (those of fee for service (FFS) Medicare) and a percentage that varies by quartile of local costs:
- For areas in the highest quartile of all areas for the previous year the percentage is 95%;
- For areas in the 2nd highest quartile, 100%;
- For areas in the 3rd highest quartile , 107.5%;
- For areas in the lowest quartile, 115%.
Payments are also capped so that they are no higher than what they would be under the current system. Bonus payments would be offered for efficiency and quality. As convoluted as that may seem, it is (almost) simpler than the current payment system (except for the fact that the current system is actually embedded in the new one as a cap–ugh!).
Some immediate questions come to mind:
- Why are payments a higher percentage of costs where costs are low and a lower percentage of costs where they are high?
- What motivated the switch from the Senate’s planed competitive bidding to a continuation of administrative pricing?
- Why aren’t rates capped at 100% of FFS costs as advocated by MedPAC and written into the House bill?
- How will the new payments affect taxpayer costs and MA plans’ availability, benefits, and enrollment?
I can answer questions 1-3 and likely will in another post (unless co-blogger Steve gets to them first). Question 4 was studied by CBO, which scored the savings at $131.9 billion over 2010-2019. Their analysis showed that MA enrollment would be lower by 4.8 million relative to a projection of current law in 2019. On average they expect the value of benefits to decline by $67 per member per month in 2019. See the CBO document for additional analysis. So, taxpayers win and some beneficiaries lose, though it depends on county cost type (high vs. low). (A prior post explained that even though beneficiaries lose something with MA cuts, the economic value of that loss is very low.)
At the moment I can only add one thing to these findings. In a paper summarized on this blog Steve Pizer, Roger Feldman, and I published a graph (reproduced below) that illustrates the effects of different payment rates (relative to FFS costs) on market exit of private fee for service (PFFS) plans. PFFS is the highest cost MA plan type and is different from the MA HMO type in important ways that make it unreasonable to extrapolate PFFS findings to the entire program. So take all of the following with a sack of salt.
The figure shows the change in probability of a PFFS plan market entry for various levels of payment to FFS cost ratio (click to enlarge). The results are qualitatively illustrative of the relative degree of market exit by payment rate for MA plans but should not be interpreted to apply quantitatively to the non-PFFS part of the MA program. A payment of 115% of FFS cost results in about a 10% reduction in PFFS entry, while a payment of 95% of FFS cost would all but eliminate the PFFS plan type.
Change in PFFS Market Entry by Payment/FFS Cost Ratio
Based on these results, I would expect relatively small reductions in MA plan availability in high payment-to-cost areas (payment 115% of FFS cost). Areas with the lowest payment-to-cost ratio (95% of FFS cost) may see considerable reductions in MA offers. However, 95% of FFS cost was the prevailing rate prior to 1997 and plans did serve high cost areas then. So it is likely that some plans may remain in markets even if they’re paid 95% of costs. Also, efficiency and quality bonuses would increase payments for plans that qualify for them. To what extent markets that currently have plans will be left without any is not something about which I care to even hazard a guess.
So, this new administrative payment rate scheme could be pretty disruptive to the MA market and the beneficiaries it serves. I think a competitive bidding system would be less so. I’m also concerned that the new system won’t stick, that Congress will find an excuse to undo it, increase payments, and then, poof, there go the MA savings. Competitive bidding would be less prone to such political monkeying, though not immune. Such a competitive system is working very well in the Medicare Part D (drug benefit) market. Why not try it in the MA program? I could answer that but this post is long enough.
Administrative vs. Competitive Health Care Pricing
Administrative vs. competitive mechanisms constitute a fundamental dichotomy in health care pricing. For the former think Medicare, for which prices are largely set via political/administrative processes. For the latter think the private non-elderly market, for which prices are set via insurer-provider negotiation. In a recent paper in the American Journal of Managed Care, Chernew, Sabik, Chandra, Gibson, and Newhouse shed some light on the implications for health care prices of administrative vs. competitive pricing. The results are not surprising.
In a retrospective descriptive analysis of geographic variation the authors find that Medicare and large-firm commercial hospital utilization were positively correlated, but spending was not. The authors interpret these results with appropriate caution since they are correlations. However, they are consistent with other work that suggests Medicare and commercial insurers have different responses to hospital competition. Commercial insurers can exploit it to drive costs downward. In contrast, Medicare may be less influenced by the effects of provider competition since it doesn’t negotiate prices (or doesn’t do so in the same fashion as commercial insurers).
The authors conclude,
The potential susceptibility of private payers to provider market power has important implications when assessing the merits of private markets or public markets in setting prices. Administrative price systems have many flaws, which are fundamentally related to the difficulty in determining the appropriate price when costs are heterogeneous, are not known very precisely, are changing over time, and may reflect discretionary provider behavior.
… Yet despite all the concerns about administrative pricing, our analysis appears to suggest that administratively set prices seem to reduce purchaser vulnerability to provider market power. The challenge for policymakers interested in administered prices must be how to mitigate distortions in the price-setting process, although policymakers will never have enough information to establish perfect (economically efficient) prices (bundled or otherwise).
The analogous challenge for policymakers interested in market systems is how to avoid the pitfalls associated with provider market power. It is not clear whether concerns about market systems are more important or will be easier to mitigate than concerns about administered pricing. However, as the country moves forward with changing the healthcare system, these concerns will be paramount.
That’s an even-handed take on the two pricing systems. Neither is perfect from every perspective. Proponents of one can (and do) easily point to flaws in the other. However, given that our system is and will remain a mix of public and private payers, sound policy must attempt to address the issues raised by both.
Before concluding, I also want to highlight what Chernew, et al. say about cost shifting:
[O]ur analysis does not necessarily indicate cost shifting. The pattern of results we observed, particularly the association with market structure, may merely reflect differential market power as opposed to a causal relationship between prices in different sectors.
That market structure has an important impact on the degree of cost shifting has already been covered on this blog. Chernew, et al.’s paper is just one more in a large body of work that suggests that ignoring market structure when considering health care pricing and price dynamics misses the point.
Medicare’s Structure and Payment Systems Part III: Prescription Drug Plans
This post originally appeared on The Finance Buff.
This is the third and final post on the basics of Medicare’s structure and payment systems. The two prior posts in the series covered fee-for-service (FFS) Medicare (post I) and Medicare Advantage (MA) (post II). In this post I focus on the relatively new Medicare outpatient prescription drug benefit, Medicare Part D.
Part D Basics
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) added an outpatient prescription drug benefit to Medicare (Part D), starting in January 2006. The highly subsidized benefit is available exclusively through private insurance plans, either MA plans offering bundled Part A (hospital) and Part B (outpatient) insurance along with a drug benefit or stand-alone prescription drug plans (PDPs) that offer no non-drug coverage (i.e., they complement FFS Medicare).
Medicare Part D accounts for 12% of Medicare spending, and about 60% of Medicare beneficiaries are enrolled in a Part D plan. Most enrollment in Part D plans (72% of it) is in PDPs. While I will focus more on PDPs below, the drug benefits available through MA plans are identical in structure and share the same payment system as PDPs.
PDPs serve multi-state regions, of which there are 34. Each region has at least 45 PDPs offered in 2009. Part D plan benefits take two fundamental forms: basic or enhanced. Basic coverage either follows a statutory minimum standard or is actuarially equivalent to it, while enhanced coverage offers additional benefits for a higher premium. Standard coverage has an average monthly premium of about $34 (in 2009) and is designed so the average beneficiary pays, at most, 25.5% of the cost of coverage, while Medicare pays the remaining 74.5%.
Standard coverage cost sharing is characterized by different coinsurance rates in each of four ranges of total drug spending (the sum of spending by the plan and beneficiary). In 2009 the standard benefit cost sharing is: 100% coinsurance for drug spending between $0 and $295 (i.e. a $295 deductible), 25% coinsurance for drug spending between $295 and $2,700, 100% coinsurance for drug spending between $2,700 and $6,154 (the so-called “donut hole” or “coverage gap”), and 5% coinsurance for drug spending above $6,154 (catastrophic coverage). These dollar amounts are indexed to average per beneficiary outpatient drug expenditures (MMA statute).
Part D Competitive Bidding
In contrast to the way in which MA plans are paid for Parts A and B (see my MA post), Part D benefits are paid by Medicare via a competitive bidding system. All Part D plans (PDPs and the drug portion of MA plans) submit bids for the cost of standard coverage. From these bids a nationwide average is computed and a statutorily determined fraction of this average cost is set as the “base premium” (about $30 in 2009). Finally, a plan’s premium (charged to each enrolled beneficiary) is the base premium plus the difference between that plan’s bid and the national average bid.
Ignoring adjustments for beneficiary risk and other details (found here) a plan is paid by Medicare a fixed monthly per-beneficiary rate equal to the national average bid less the base premium. Because the payment is tied to national average bids (a market signal) this is a form of competitive bidding. In contrast, MA payments are not set competitively. They are set via administrative pricing in which payments are determined by Congress. The Part D competitive pricing mechanism theoretically should drive payment downward as plans compete to offer lower-premium plans.
The Drug Negotiation Controversy
Part D plans may negotiate with drug manufacturers for volume discounts, but Medicare as a whole may not. This prohibition on direct Medicare-drug manufacturer negotiation was among the more controversial aspects of the Part D program and has received considerable attention from policy makers and academe.
Another related element to Part D is that plan formularies have inclusion requirements. In particular, they must include “all or substantially all” drugs in six categories: antidepressants, antipsychotics, anticonvulsants, antiretrovirals, immunosuppressants, and antineoplastics.
Critics argue that Medicare’s lack of authority to negotiate drug prices leads to higher expenditures for plans, beneficiaries, and Medicare. Others have pointed out that providing Medicare the authority to negotiate directly with manufacturers would not lead to price reductions on its own. To achieve savings Medicare would also need the ability to exclude drugs from its formulary. This ability to tighten the formulary would provide the leverage to negotiate bargains.
Interest remains among policy makers and certain advocacy groups in reducing Medicare drug prices. This idea is part of President Obama’s agenda so the issue may arise as he looks for ways to finance health reform.
Medicare’s Structure and Payment Systems Part II: Medicare Advantage
This post originally appeared on The Finance Buff.
This post is the second in a three part series on Medicare’s structure and payment systems. The first post is found here. I expect the final post to be released next week (link to final post).
In my first post on Medicare I summarized some of the elements of fee-for-service (FFS) Medicare. Beginning in the early 1970s and growing in fits and starts since then, Medicare has included other types of insurance plans offered through private carriers. This post will review some of these other Medicare products.
Medicare Advantage
The Medicare Advantage (MA) program (a.k.a., Medicare Part C) shifts the cost risk from the Medicare program to a private insurance company. For the moment think of an MA plan as an HMO or a PPO. Through an MA plan, beneficiaries receive the hospital (Part A) and outpatient (Part B) insurance they would otherwise get directly from FFS Medicare. Many MA plans offered a drug benefit before such benefits became available to all beneficiaries in 2006 (via Part D).
Medicare pays an MA plan a predetermined monthly rate for each beneficiary it covers, independent of the services used (the rate is adjusted to reflect the financial risk of the beneficiary to the plan). The plan may also charge enrollees a premium and other cost sharing. An MA plan may offer benefits more generous than FFS Medicare, covering more services at lower cost to the beneficiary. About 20% of Medicare beneficiaries are enrolled in an MA plan, and the program accounts for nearly the same proportion of Medicare spending.
Thus, an MA plan acts as a middleman between Medicare (the taxpayer) and the service provider (the doctor or hospital). The plans, not Congress, negotiate payments with service providers and are at risk for the cost of covering each enrolled beneficiary. Since MA plans are private entities bearing risk, negotiating with providers, and competing for beneficiaries the MA program has the patina of a “free market” solution to cost control.
But Congress sets the payment rates. The payment system uses terminology that sounds like competitive bidding. Plans “bid” against a “benchmark,” which is the payment rate cap (the most paid for an average-risk beneficiary). If the bid is below the benchmark, the plan receives 75% of the difference to fund additional benefits and/or lower cost sharing.
However, the benchmark has nothing to do with plan costs. It is set by Congress via a complex formula. Today, on average payments to MA plans are 14% higher than average FFS Medicare payments. This is not because MA plan enrollees are 14% more costly. In fact, evidence suggests that MA enrollees are, if anything, less costly than FFS beneficiaries. Besides, the payments are risk adjusted. No, MA plans are simply overpaid.
The History and Future of MA Payment Rates
Plans weren’t always overpaid. Prior to 1997, for each enrollee, Medicare HMOs were paid 95% of per beneficiary FFS cost. The logic was that private plans ought to be able to provide Medicare services more efficiently than FFS Medicare through a combination of controlling utilization and driving hard bargains with providers. So, Medicare took 5% off the top. Competition was supposed to ensure quality and the provision of services of value to beneficiaries. A consequence, however, was that insurers didn’t offer plans in rural areas where contracting and marketing were too costly relative to the payment.
To increase the role and availability of Medicare HMOs, payments were increased over the years and are now above FFS costs. In addition, a new plan type was introduced, Private Fee-for-Service (PFFS). These plans are exempt from many of the requirements other MA plans face but are paid just as generously. In particular they do not have to set up provider networks and can base their costs on the FFS physician payment schedule. They’re indemnity insurance just like traditional FFS Medicare, only offered through private insurers. In recent years PFFS plans have been the fastest growing and most costly MA plan type.
There have been numerous calls by Medicare and budget watchdog groups to reduce MA plan payments to 100% of FFS cost (the Medicare Payment Advisory Commission, the Congressional Budget Office). Another option likely to reduce payments would be to abandon the administrative pricing scheme altogether and shift to a competitive bidding model. Plans with lower bids for standard benefits would win contracts while higher bid plans would not. Or, in another variation, plans with bids above the average would simply charge the difference as premium, while those below the average might be able to offer a rebate or extra benefits with the difference.
President Obama’s budget proposal includes a plan for MA competitive bidding. I will be watching closely to see if Congress retains this idea as next year’s budget works its way through the legislative process.
In my next post on the basics of Medicare I will discuss the relatively new prescription drug program. It already has competitive bidding (for real). But it has other features which cause it to be more costly than it could be.
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