• Can competitive bidding be part of a Medicare compromise?

    The following first appeared on Ezra Klein’s blog at The Washington Post.

    Perhaps the most important book a health policy wonk could read today is “Bring Market Prices to Medicare,” by Robert Coulam, Roger Feldman and Bryan Dowd. In it, you’ll find an idea that neatly balances conservative and liberal priorities for Medicare and saves money. Moreover, what is proposed does not require any major restructuring of the program, and a version of it was signed into law last year and repealed a week later.

    What is it?

    Those who have been following me at The Incidental Economist already know: It’s competitive bidding (also called “competitive pricing”). Here’s how it works: Begin with current Medicare, both the traditional, fee-for-service arm (the public option) and the Medicare Advantage (MA) program. Recognize that all those plans — the public option and all the private MA carriers — are government-subsidized, though in a Byzantine way with a long, tortured and politicized history we need not go into.

    Next, throw out the entire crazy quilt of subsidy schemes and replace it with the following: all plans in a market (e.g., a county), fee-for-service included, offer bids for the cost above the standard Part B premium of provision of a standardized set of benefits (e.g., the current Medicare benefit) for an average beneficiary. The lowest bid in a market — whether from a private plan or from fee-for-service Medicare — establishes the subsidy (premium support) offered for enrollment into any plan in the market. This amount would then be risk-adjusted according to beneficiary health status. Beneficiaries opting for plans with higher costs (bids) or additional benefits would pay the additional cost. Means testing or a low-income subsidy program, as exists in today’s Medicare, could be incorporated to protect poorer beneficiaries from high residual out-of-pocket costs.

    If all that was way too complicated, see this far simpler vignette.

    This competitive bidding system is similar in spirit, though different in detail, than that which would set subsidies in the ACA’s exchanges, and currently does set subsidies in FEHBP and Medicare Part D. In other words, it is one of the very things that distinguishes the Republicans’ plan for Medicare from programs to which it has been (incorrectly) compared. The Republican plan would not set subsidies through such a market process. In that sense, it is not as market based as it could be.

    Competitive bidding harnesses the market, and in a way that offers crucial protections for beneficiaries and taxpayers.

    One charge against the Republican plan is that beneficiaries would be on the hook for every dollar increase in health-care costs above voucher levels. That’s very different than current Medicare, and it frightens people. Competitive bidding is different. It guarantees a subsidy that is sufficient to purchase at least one plan for the standard Part B premium. That offers beneficiaries considerable protection against health care cost inflation, though it does not guarantee that the cheapest plan is one they prefer. It may not be traditional Medicare, for example.

    Another charge against the Republican plan is that it puts voucher levels on the same footing as today’s MA payment rates, which have been driven sky high by the political process. Granted, nothing can stop a future Congress from doing what it can pass, but at least establishing an apolitical, market-based process for setting subsidies clearly conveys intent to depoliticize them. Putting the system within the purview of an IPAB-like board would further insulate it from politics. In this way, competitive bidding offers taxpayers protection against the type of cost run-up experienced in the MA program.

    So, competitive bidding is market-based, involves private plans (hence, offers choice), and protects against program over-runs, so it should attract the interest of conservatives. Yet it includes a public option and protects beneficiaries from health care cost inflation, so it should attract the interest of liberals. Perhaps for these reasons, a version of it was included in the ACA, and then overwritten by a modified version of the prior Medicare subsidy scheme. (That muffled weeping you might have heard upon passage of the Budget Reconciliation Bill in the spring of 2010 was that of a few health economists mourning the loss of competitive bidding.)

    But let’s be clear. Competitive bidding is not a panacea for Medicare. It cannot tell us what the standard set of benefits upon which plans bid ought to be. It would mean that the beneficiary cost of traditional Medicare coverage, as well as private plan coverage, would vary across markets, a feature some might consider inequitable. Though it has been estimated to save 8 percent of Medicare costs, it cannot, by itself, change the program’s growth rate. For that, further reforms to how traditional Medicare and MA plans pay for care would be required, as well as changes health system-wide.

    However, competitive bidding would ensure that taxpayers get the best value per dollar within the framework of the program’s current structure. Moreover, it would continue the protection from health care cost inflation the program offers beneficiaries today. Those are two big advantages that no other current proposal simultaneously offers. Could competitive bidding be part of a Medicare compromise? I’d like to think so, but I would not bet on it.

    • I have not read the book yet (It’s on its way) but I couldnt resist commenting. Would the bidding only affect per-unit cost or if bidding would solve the problem of costs associated with volume / care coordination / inappropriate utilization etc. I feel its the second issue that needs more attention. I hope the proposal has elements that addresses over / inappropriate utilization and care coordination.

    • This would work fine, although maybe not with fee for service, but the market would sort that out. Here is a more detailed examination of such a plan from an economic point of view.


      We know what to do, we just do not have the political will to do it. And if Democrats were smart, which they have not exhibited so far, they would adopt this sort of plan as the proper response to the Republicans.

    • A few problems:
      – I don’t see how this will save any money. Insurance companies will still be setting their fees at “cost plus”. (As you point out, there may be some small regional variation but low cost regions are likely to be outweighed by high cost regions.
      – In addition, Medicare as a large payer can set/negotiate fees much lower than a bunch of small insurance companies who have little market power.
      – What happens when the lowest cost benchmark policy does not offer coverage in my area. This is common now where there are a limited number of insurance companies who contract with doctors and hospitals in any given area. I would be forced to buy a high cost policy to get local coverage.

    • Mark

      If you go away from fee for service to fixed price, then providers will have the incentive to cut costs, because their profit will be what is left over from revenues minus costs. Part of this can be done by technology and part from having a higher volume. One would expect a number of consortiums of health care providers (physicians, hospitals, clinics etc) to enter into combines to bid on a fixed price basis.

      Since volume is a key driver I think you will find that almost every area of the country would be served by more than one of these consortiums.particularly since Medicare would be handing out a large payment based on the number of enrollees.

      Is this perfect, no. Will there be gaps, yes. But no plan is perfect and we need to change the way health care is delivered in order to change the incentives from increasing costs to decresing costs.

    • Sid,
      I think there is a clear conflict between the need for volume to achieve efficiencies and the idea that competition will lower prices. You can’t really have both.
      I see your point about moving from FFS to fixed price and wasn’t aware this was part of the plan. This does sound like the ACOs which were set up by the ACA.
      I still think that taking a hatchet to prices is the wrong approach and will just end up cutting the wrong things. There is much waste and over utilization of ineffective procedures and I think it would be much better to use a scalpel to cut these out.