• Rep. Hensarling offers competitive bidding

    Today, Rep. Hensarling, the GOP co-chair of the supercommittee, offered the Domenici-Rivlin plan for Medicare as a way forward in negotiations with Democrats. John Parkinson, and many others, quote Rep. Hensarling,

    [H]ow about a bipartisan plan?’ We would be willing to negotiate around the Rivlin-Domenici Medicare plan. It’s not our version, it’s a bipartisan version.

    Yes, it is bipartisan, coming from the Bipartisan Policy Center. But what is that plan, exactly? Why, it’s a variant of competitive bidding, including the following features:

    • Private plans are permitted to participate, so long as they offer at least the same benefit as traditional Medicare (just as they do today).
    • Traditional Medicare, the public option, remains part of the program.
    • All plans, private and public, submit bids to the government.
    • The second cheapest bid sets the subsidy (as opposed to the administrative formula that does so today).
    • Thus, at least two plans in every market are available at an affordable price (caveat below), though we can’t say which plans those would be. This affords beneficiaries some protection from rising health care costs (don’t worry, I know the caveat … it’s coming).
    • At the same time, taxpayers don’t pay more than necessary to provide the Medicare benefit, offering them some protection too.
    • The caveat: if the rate of growth of the program exceeds GDP + 1%, the subsidy will be reduced to a percentage of the premium of the second cheapest plan to bring growth in line with GDP + 1%. One hopes this is not binding, but that cannot be guaranteed. This cap is included to ensure a favorable CBO score, in light of the challenge of scoring competitive bidding.
    Additional details on the Domenici-Rivlin plan is here (pdf). Other important notes:
    • Medicare Part D, the ACA exchanges, and the Federal Employees Health Benefits Plan, all use some variant of competitive bidding.
    • It’s relatively standard in government procurement. Competitive bidding, though of a different variant than Domenici-Rivlin, is how many people purchase customized services for their home (renovations, painting, etc.).
    • All Medicare plans (public and private) are subsidized today.
    • All Medicare Advantage Plans must offer at least the Medicare benefit today.
    • Something must be done to control Medicare costs and the ACA, though it includes some worthy ideas, is not enough.
    • Some have concerns about selection (favorable for private plans, adverse for traditional Medicare), though those could be politically convenient objections. The effects of selection can be managed, at least somewhat. I wouldn’t go so far as to say selection is not a legitimate concern. I would only say it isn’t self evident to me that it should disqualify competitive bidding from consideration. Selection is an issue across the public-private divide in Medicare today, and it affects traditional Medicare’s and taxpayer’s costs.
    • If one believes that a public plan can offer the Medicare benefit at a lower price than private plans (here’s the record on that), one might think competitive bidding would favor traditional Medicare.
    • If one believes that at least two private plans can offer the Medicare benefit at a lower price than traditional Medicare, one might think bidding would favor private plans (some evidence in that direction).
    • Likely which can bid lower varies by market. Over time, it depends on how plans are able to innovate, which, in part, depends on how traditional Medicare is permitted to innovate. Management by Congress puts it at a disadvantage.
    I encourage everyone to think through competitive bidding, even if you’re pretty sure you hate the idea. The reason is that it at least forces you to consider just about every politically important aspect of the Medicare benefit. If you haven’t followed every link in this post, those are good places to start. I like competitive bidding as a concept for this pedagogical reason alone.
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    • What incentive would a company have to make the lowest possible bid? As I understand it, all companies would be free to convince Medicare customers to sign up with them no matter how high or low their bids are.

      • Lower bid = lower premium or even a premium rebate. Why would a home renovation company bid low? You want the customers, you’ve got to offer a competitive price.

        • A home renovation company gets only one shot at winning the bid.
          As I understand it with competitive bidding for Medicare, there are really two “bids” one to the government that the company really doesn’t have to win because win or lose it can turn around and make a second bid (in the form of premiums) to individual Medicare recipients.

          I am assuming that it would not be considered fraud if a company put in a bid to the government at $600 per person per month knowing it could do better and then, upon learning that $500 was the “winning” bid lower its premium to that amount to compete for customers.
          I don’t have a clue if that assumption is correct but if it is the company has an incentive to bid high . If $600 is the lowest bid, the company gets $600 a month per customer, not $500. If $600 is not the lowest bid, it can always lower its premium when it starts “bidding’ for individual Medicare customers.

          Because there are two “bids” not one as in most cases of competitive bidding I don’t see the incentive to make the initial bid (the one to the government) as low as possible.

          • You’re free to pay a higher premium to a higher bid plan. Recognize you don’t get more for that premium, you just pay more. I’ve analyzed Medicare plan data for a decade. That’s not how the vast majority of Medicare beneficiaries behave.

            This may be of interest: http://theincidentaleconomist.com/wordpress/medicare-advantage-payment-vignettes/ .

            • I had seen those vignettes.

              I seem to be having trouble stating the issue clearly. Lets try this.

              I am assuming there will be a two step process in which MAs make bids to the government and THEN (after that process is complete) start marketing their product to individual Medicare recipients)

              Lets suppose the competitive bidding process STARTS with an MA in the bar that really could do the job for $550 deciding whether to bid $550 or $600. If it tells the government it needs $600, one of two things will happen. If $600 is the lowest bid, (or second lowest bid if that is the benchmark) it will get $600. If the lowest (or second lowest) bid is $550, it will get $550 a month. That will force it to lower its premium to $550, but that is something it would have had to do anyways if it had bid $550 instead of $600. On the other hand, if it tells the government it needs $550, there is no chance (if Medicare payments are based on the lowest bid) or less chance (if they are based on the second lowest bid) of getting $600 a month from the government.

              I am assuming that making an artificially high bid and then offering a lower premium would not get the MA arrested for fraud or price fixing,

              I do understand that there is a clear incentive to offer INDIVIDUAL Medicare recipients the lowest possible price..

            • “but that is something it would have had to do anyways if it had bid $550 instead of $600.” No. This is not right. I’ll cover this tomorrow in a post. (Are you the one who emailed me about this?) If after that post you still think I’ve missed your question, let me know.

    • “If one believes that a public plan can offer the Medicare benefit at a lower price than private plans (here’s the record on that), one might think competitive bidding would favor traditional Medicare.”

      My opinion (for what it is worth) is that single payer solutions (like Medicare) are likely to dominate market based solutions in health care due to the nature of health services. I simply look at how efficient animal vets are at extracting money in a crisis to discard “pay-go” systems. Nor is such an approach really compatible with the modern emergency room system (which is both frightfully expensive and unable to deny care — how do you haggle during a heart attack?).

      Private insurance plans have odd incentive problems, that tend to suggest the dominate strategy is to either try not to actually pay when the expensive procedure is needed (recission) or to try and find pricing inefficiencies. So I am skeptical that they are really the best way to go.

      But I freely admit that none of that really stops a competitive bidding scenario from being tried. If I am correct, we will end up with single payer and will have learned a lot about markets. If I am wrong, we might end up with a more innovative and efficient health care market.

      I am having a hard time seeing (at a conceptual level) how this can go wrong.

      [at a practical level, one can imagine all sorts of ways that it could go wrong, but that is true of any complex human system]

      • Medicare has not been and will not be a single-payer (in the sense of one plan) program. The political equilibrium is a hybrid. So, the question becomes, how to pay premium support (subsidies, vouchers, whatever you want to call it) in a rational, efficient way? Recognize we pay premium support today, but in an ad hoc way driven by political power.

    • Does the requirement that private companies offer at least the same benefits mean that the must cover every service that Medicare covers under the exact same terms that Medicare does, e.g. that they couldn’t make it more difficult for men over 80 to get prostate screening. and that they couldn’t substitute a service of greater medical value that Medicare doesn’t cover for one of lower medical value that it does cover?

      • It’s a good question. I think the details as to how exactly plans could or could not diverge from what traditional Medicare does would be open to debate and negotiation. However, I will see if the Domenici-Rivlin group has thought about this level of detail yet.

    • So, who covers the small subset of Medicare users who cost so much? Are those people dispersed into each plan so that all insurers suffer equally? Or does each plan take the risk of getting ‘too many’ costly users? Since we know that a small subset of users costs the most, the choices are actually pretty clear: do we continue to allow these users to access all the system’s resources, do we reduce everyone’s access to the system’s resources, do we increase the cost of using the resources to just the most needy or to everyone, or do we reduce the payment to those who provide the resources?

      Looking at all the numbers and the sites aforementioned, I really do not see how we do not end up with a national health plan in the future. The rich will never allow themselves to be taxed to ensure the viability 0of Medicare/Medicaid. Just isn’t happening.

      • Huh? Nobody is put into plans. People choose them. Premium support is adjusted for risk and follows the beneficiary. If you are sicker your premium support (voucher, subsidy) is higher.

        How do we really control costs, bend the curve? That’s outside the scope of what competitive bidding can do by itself. http://theincidentaleconomist.com/wordpress/limitations-of-competitive-bidding/

        However, if one of the bidders begins to control costs better (e.g. traditional Medicare), the others will have to follow or they will be driven from the market. That purging of inefficiency is what competitive bidding does. We have no such purging mechanism in Medicare today. We just pay plans a lot to encourage participation and then wash our hands of the fiscal consequences.

        • I did not say that people are put into plans; my point is that the most expensive patients can NEVER pay enough through deductibles to offset their costs. Never. So, knowing that, if too many of those people choose one particular plan, the amount of voucher necessary allow that insurer to survive would be staggering. If the well-known point that about 5 percent of people drive more than 50 percent of the costs of health care is indeed true, what would their voucher costs be? Or are we going to meld their costs into everyone’s vouchers to hide the true costs of those 5 percent?

          Isn’t that intellectually dishonest? More to the point, does it not divert our attention from the real issue: do we ration health care or do we raise other people’s costs to support that 5 percent? Now, before you dismiss me as some heartless schmuck, I am sure there is enough money in America to take care of everyone’s health care; we just choose not to do so. We avoid the discussion by focusing on everyone when the true drivers of rising costs are actually a small subset our population. In short, we lie to ourselves.

          And now for something completely different….not…..

          Maybe I am dense, but I still don’t see how competitive bidding will reduce costs but in a marginal manner (if at all). If private plans reduce their overhead and administrative costs to traditional Medicare levels; do they still try to make a profit? Or are these private plans all non-profit? If so, why have them exist at all? What value would a private plan add to the system if it just replicated Medicare?

          • Compare competitive bidding to how Medicare works today (which is a good indication of the public-private, political equilibrium for the program), not to how Medicare might work under some other arrangement not on the table or that hasn’t existed two decades (public only, for instance). As I’ve blogged, the savings is 8% (relative to how payment rates were set last year, there have been changes since then).

            Plans bear the risk (and reward) above the payment rate and premium. The premium is set by the bid. Simplifying, it is bid – payment rate and is the same for all enrollees (aside from low income subsidies). So a plan that selects or is selected by only folks at the top of the distribution would get crushed, unless there were special provisions for risk adjustment in such a case (likely) or special categories of plans to address such cases (also possible).

            Related, see: http://theincidentaleconomist.com/wordpress/competitive-risk-adjustment-another-try/

    • Full disclosure: I work with the Domenici-Rivlin Task Force on health care issues. Your post is excellent. But one point that I found perplexing is your concern about the disadvantage of traditional Medicare when it comes to innovating. Congress (and the rest of the political system) does limit Medicare innovation. But this suppression of innovation and managed care tools in general is the key reason for offering private plans in Medicare and creating a level playing field that opens the possibility that private plans will grow faster than traditional Medicare. To me, the key issue in whether this competition will be a healthy development is to sufficiently limit risk selection so that enrollment shifts are driven by value rather than risk.

      • To be precise, to me it is just a fact and to some others it leads to a concern. The fact is precisely as you stated it: traditional Medicare is and has been highly constrained in its ability to innovate. The concern by some is that this puts TM at a competitive disadvantage with respect to private plans. (It’s true that it does that, whether that is a concern depends on one’s policy and/or political preferences. I do not think it relevant what mine are so I do my best to leave them out of my posts. Hence, this is not my concern, but a potential concern of others.) To others still (and I infer you), this is a welcome strength of a multi-plan system operating in competition. (Again, it is true that this the diversity of innovation is a strength — apart from selection issues — whether it is a welcome one is matter of policy/political preference.) One question is whether TM can be permitted to innovate a bit more, especially if it is to be placed in a competitive environment.

        I agree 100% that one should want competition and innovation to focus on value and not risk selection. Selection seems to be the principal concern about such an arrangement. What I would like to see coupled with a more competitive system is the ability for researchers to access more private plan utilization data in order to more fully assess selection.

        To your knowledge, has there been a comprehensive review of the selection literature as it pertains to Medicare? Related, has there been a review of all possible ways to mitigate selection?