Competitive bidding, administrative pricing, and the CBO effect

Austin has an interesting post up this morning contributing to the ongoing discussion between Ezra Klein and Reihan Salam comparing the Ryan-Rivlin plan and the Affordable Care Act.  He points out that the ACA sets subsidy levels through a competitive bidding process and Ryan-Rivlin relies on the Secretary of Health and Human Services to set them administratively.  Given our history with administrative pricing in Medicare, particularly with Medicare Advantage, Austin argues that this approach is unlikely to contain costs (provider groups and plans will persuade Congress to jack up the rates).

So what are Ryan and Rivlin thinking?  We don’t know, of course, but we discussed these points in the past with staff from the Senate Budget Committee and the House Ways and Means Committee and their comments were illuminating.  First and foremost, any reform proposal has to be scored by the Congressional Budget Office, and CBO has a hard time scoring competitive bidding.  What will the subsidies cost?  It depends on the bids.  If CBO can’t score the subsidies, they can’t calculate savings from the proposal.

A second effect of CBO is more speculative on my part: How does CBO scoring affect what policymakers believe about the future effects of their proposals?  I suspect that when a lawmaker proposes a fixed schedule of spending or a set of administrative rules that receives a favorable CBO score, he or she feels like they did the best job they could in trying to hit their spending targets.  There are exceptions to this like the notorious Medicare physician fee schedule or the Alternative Minimum Tax, both of which are cynically adjusted regularly to game the CBO, but I think these are exceptions.  Consequently, while I strongly agree with Austin’s prediction that administrative rates under Ryan-Rivlin would be jacked up by interest groups over time, I would bet that Representative Ryan doesn’t see it coming.


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