Bring market prices to Medicare

The title of this post is also the title of the book version of the Medicare competitive pricing ideas of Robert Coulam, Roger Feldman, and Bryan Dowd (all colleagues with whom I have worked or still do so). Since I’ve already described and have long endorsed their plan for Medicare, I’m not going to do so in detail here (this prior post links to a description as well as other, related posts). Very briefly, and quoting my Kaiser Health News column,

According to [analysis of their plan] taxpayers could save 8% or about $50 billion per year (based on a 2010 Medicare cost estimate) through a competitive pricing system in which all plans, fee-for-service included, offer bids for a standardized set of benefits and the government pays all plans based on the lowest of these cost estimates. These potential savings come from the fact that [Medicare] Advantage plans can achieve lower costs in some markets, while fee-for-service can in others. As a result, with payments pegged to whatever plan type has the lowest cost in each local market, taxpayer dollars are used in the most efficient manner.

Their book offers more, including an entire chapter (number 6) on Medicare’s mostly failed attempts to incorporate competitive pricing for the goods and services for which it pays.

In addition to that chapter, to which I may devote another post in the future, the following passages struck me as worth sharing on this blog today. First, one big problem for the Medicare budget is the effect of supplements–private, wrap-around coverage that fills in the cost sharing of traditional Medicare. From pages 82 and 84,

The general difficulty with supplementary insurance is that the enrollee’s total expenditures increase when the supplementary policy eliminates the effect of coinsurance and deductibles, and Medicare typically pays for about 80 percent of that increased utilization, while the supplementary insurer pays for the remaining 20 percent. This implicit price subsidy of private supplementary insurance resulting from the spillover effect of supplementary insurance on the Medicare program’s budget has been recognized for at least twenty years (Christensen, Long, and Rodgers 1987), but Congress has taken no action to reduce it. […]

In theory, FFS Medicare could offer the supplementary coverage and price it correctly to eliminate the subsidy, but no one would buy that policy unless the same requirement were placed on sellers of private supplementary policies through a tax on supplementary insurance premiums.

Finally, there is a nice literature review for readers interested in the deep background on competitive pricing for Medicare plans (p68):

HMO efficiencies would result in savings to the government if HMO bids were used to set the payment rate for Medicare health plans. The first published estimate of the savings from competitive pricing was provided by Thorpe and Atherly (2001), who estimated that competitive pricing with the government payment tied to the average Medicare+Choice plan bid in the beneficiary’s county of residence would save $16 billion in 2002 (about 8 percent of total Medicare expenditures for the aged population), almost all due to higher payments by FFS beneficiaries to remain in FFS.

Next, in 2006, the Congressional Budget Office estimated that setting the government payment equal to the minimum bid in each county would have saved 8–11 percent of Medicare costs in 2004. Setting the payment equal to the enrollment-weighted average bid in each county would have reduced costs by only 1–2 percent. The CBO noted that these estimates were subject to “great uncertainty”1 and assumed that per-capita spending in the traditional Medicare program would not be affected by competitive pricing (U.S. Congressional Budget Office 2006, 4-17).

Thorpe and Atherly’s estimate of the savings from an average-bid payment system exceeded the CBO’s estimate because they attributed greater efficiency to private plans, assuming the average M+C plan could provide standard Medicare benefits for 84 percent of what it cost traditional Medicare in fiscal year 2002. They based this cost differential on unpublished CBO data as well as the bids submitted by managed-care plans in the Denver demonstration site and reported by Dowd (2001). On the other hand, in published data, the CBO attributed an overall efficiency advantage of 3 percent to FFS in 2005, although private plans were 8 percent more efficient than FFS in the highest cost counties (U.S. Congressional Budget Office 2006, table 2-1).

I’ve put the full references from the citations above in the reference section below. To these I’ve added some others of relevance that I grabbed from the references section of the book.


Atherly, Adam. 2002. The Effect of Medicare Supplemental Insurance on Medicare Expenditures. International Journal of Health Care Finance and Economics 2 (2): 137–62.

Berenson, Robert A. 2004. Medicare Disadvantaged and the Search for the Elusive “Level Playing Field.” Health Affairs Web Exclusive. December 15, w4-572–85.

———. 2008. From Politics to Policy: A New Payment Approach In Medicare Advantage. Health Affairs Web Exclusive, March 4, w156–64.

———, and Bryan Dowd. 2008. Medicare Advantage Plans at a Crossroads—Yet Again. Health Affairs, November 24, w29–40.

Christensen, Sandra, Long, Stephen H., and Jack Rodgers. 1987. Acute Health Care Costs for the Aged Medicare Population: Overview and Policy Options. Milbank Quarterly 65 (3): 397–425.

Dowd, Bryan. 2001. More on Competitive Pricing. Health Affairs 20 (1): 306–7.

———, Robert Coulam, and Roger Feldman. 2000. A Tale of Four Cities: Medicare Reform and Competitive Pricing. Health Affairs 19 (5): 9–29.

———, Robert Coulam, Roger Feldman, and Steven D. Pizer. 2005–6. Fee-for- Service Medicare in a Competitive Market Environment. Health Care Financing Review 27 (2): 113–26.

———, and Roger Feldman. 2002. Having It All: National Benefit Equity and Local Payment Parity in the Medicare Program. Health Affairs 21 (3): 208–14.

———, Roger Feldman, and Jon Christianson. 1996. Competitive Pricing for Medicare. Washington, D.C.: AEI Press.

———, Roger Feldman, and Robert Coulam. 2003. The Effect of Health Plan Characteristics on Medicare+Choice Enrollment. Health Services Research 38 (1, pt. 1): 113–35.

Thorpe, Kenneth E., and Adam Atherly. 2001. Reforming Medicare: Impacts on Federal Spending and Choice of Health Plans. Health Affairs Web Exclusive. October 10, w51–64.

———. 2002. Medicare+Choice: Current Role and Near-Term Prospects. Health Affairs Web Exclusive. July 17, w242–52.

U.S. Congressional Budget Office. 2006. Designing a Premium Support System for Medicare.

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