• Competitive risk adjustment (another try)

    I don’t think I did a good job in my post this morning of explaining my idea of competitive risk adjustment. So, I’ll try again. Before I do, I want to point out that I can think of many, many variations on the idea. My objective is just to present the simplest possible version I can think of to convey the spirit of it. The rest are details, important for implementation, but this will not be implemented. It might not even be a good idea. I trust people who are qualified to make that judgement will tell me so. That’s why I’m posting about it. Also, should you know of any papers that present this idea or something like it, let me know.

    Today, payments to Medicare Advantage plans, as well as the implicit subsidy for traditional Medicare, are set by the Medicare program. Competitive bidding would reverse the flow of information. Rather than the program telling plans what it will pay, plans would provide information, bids, to Medicare on the cost of providing the standard benefit to an average beneficiary. Medicare would then select the lowest bid and pay all plans, including traditional Medicare, that amount as a subsidy for an average beneficiary.

    That’s the key. It’s the subsidy for an average risk beneficiary. Medicare doesn’t actually pay the same amount for all beneficiaries. If a beneficiary is sicker, the risk of larger expenses is higher and a plan is paid more. For healthier beneficiaries, a plan is paid less.

    Beneficiary risk can be quantified, and is by the Medicare program. For each beneficiary it’s expected (predicted) spending as a fraction of average spending. So, it’s a ratio I’ll call s that is positive and equal to 1.0 for an average risk beneficiary. The expected spending is calculated based on prior diagnoses and demographics.

    Now, here’s the competitive bidding part, but with a twist on the style I’ve been writing about for months and described above. Rather than bid one price for an average beneficiary, why not have plans bid on a set of prices for a set of risk ranges? That is, break the range of risk, s, into intervals. As just one example, consider four intervals (the actual values here may not make sense but that is not important conceptually):

    1. 0.0 < s < 0.5
    2. 0.5 < s < 1.0
    3. 1.0 < s < 1.5
    4. 1.5 < s

    Now ask plans to submit four bids, one for each interval of risk. A bid for an interval would be the cost of providing the standard Medicare benefit for an average beneficiary of risk in that interval. The lowest bid in each interval sets the subsidy for that range of s. Actual payment within the interval would have to be scaled since the subsidy amount is for an average beneficiary and, clearly, the interval reflects a range of beneficiaries. But, that’s a detail.

    Why do this? One reason is to capture more information about cost from plans than a single bid, across the full range of risk, could provide. By discovering plan costs for high and low risks separately, the program can fine tune payments within risk bands and perhaps do so more efficiently than it can with an administrative pricing system, even one with administrative risk adjustment. Fundamentally, if one believes that the market can reveal costs, but one is worried about favorable selection (cherry picking) with current risk adjustment approaches, then using the market to reveal costs by risk type is one way to address that concern.

    Is the basic idea clear? Can anyone see other problems? Can anyone express this more succinctly? Is this nuts?

    UPDATE: My brain wandered off while originally writing this and I included a nonsensical paragraph and footnote about low bids. Since what I wrote made no sense, I’ve taken it out. I also added a paragraph that explains why one would risk adjust in this way.



    • I like this idea and I really like this kind of risk adjustment because I think it allows plans to play to their strengths. And, I think as the economics of being an insurer change, disease management will become more and more important. Your idea of risk-based bidding would be a free-market way for a plan with a strong network of, say, nephrologists, and disease managers specializing in kidney disease to capitalize on that strength.

    • It defeats the purpose of insurance to have different risk categories. Medicare pays all claims so it has only one risk category and one average payment. If you allow private insurance to establish risk categories and different benefit packages, they will game the system to attract low risk patients. Everyone else will be stuck with high priced plans.
      Switzerland has a private insurance market where all insurance companies must sell a basic package of essential coverage (which is quite complete) to anyone who applies. Plans compete by selling add-on insurance which offers more coverage.
      You point out a few of the problems with allowing risk categories. There are many more and it is a bad idea since it will be used to cherry pick low risk patients and increase costs for people who happen to be ill.

      • Mark, stop ignoring reality. Medicare Advantage has 22% of enrollees. Medicare is not monolithic. It will not be. I presume you do not like the fact that today we pay MA plans vastly more than FFS Medicare. Similarly, as I’ve shown, FFS Medicare costs more than the cheapest private plans. On this point you will, no doubt, come back with “it’s all cherry picking.” Well, how do we fix that? Don’t say, go to 100% FFS. That’s not going to happen. You can’t have perfection. So, how do you get something better than status quo? The only study on this shows that we could save $50 billion through bidding. You like wasting $50 billion?

        Insisting on the ideal is the same as advocating for the status quo. Show a bit of flexibility and maybe you’ll see that improvement is possible.

    • Austin,
      I seem to have gotten your shorts a bit twisted so I will try to unwind them from a reality based perspective.
      I think that the MA program has proved my point on the problems of dividing Medicare into groups to be bid upon. The only thing that MA has done is to increase costs to Medicare and improve profits of the insurance companies. (I believe that this statement is grounded in reality.)
      I’m don’t understand your statement that “FFS Medicare costs more than the cheapest private plans”. I’m not aware of “private Medicare plans” unless you are referring to MA which is 15% more expensive than Medicare and yes, they do cherry-pick.
      We can cut out the added expense of MA and we should. Anything that replaces it should be “universal access” to prevent cherry-picking and to prevent any extra burden on people who are ill. You can’t make distinctions by risk. Everyone knows that it is the sick people who cost money. But everyone will be sick at some time and that is why we have insurance… to spread the risk… not concentrate it on sick people.
      I’m not sure how we can save $50 billion through bidding when it is a zero sum game. In total, you have the same number of people and the same expenses. Dividing them up by risk and bidding it out for $50 billion less means that some insurance companies will lose money (not likely since MA plans were all bailed out) or patients have higher expenses through “creative” insurance schemes (most likely). Add in the higher overhead expenses of private insurance companies and it just doesn’t add up in REAL terms. I’m willing to consider other approaches but they just don’t add up.
      There is a way to reduce expenses and that is to have strong government regulation of prices and services which is the way the rest of the developed world does it. All 20 other developed countries have better health and access at half our cost. They do this through strong regulation of prices and services. This means less profit for the health industry and that is the problem in the US. We have government “Of the 1%, by the 1%, and for the 1%” (per Stieglitz in Vanity Fair) so the health industry can rest knowing it is safe from having it’s profits cut. That is the really sad reality.

      • Mark, after this reply, you’ve lost me as a correspondent (at least until I forget and chime in again). You appear not to have been reading my competitive bidding posts. Meanwhile, you’re stuck dreaming of your ideal solution. It may, in fact, be optimal — I won’t argue that point, though I’m not necessarily agreeing that it is. My point, and I’ve made it so many times, is that we must work within the realm of the possible. Your ideal solution will not happen, not anytime soon anyway. Meanwhile, there is a vast sum being spent that need not be. You know it. Some of it can be saved, but not by insisting on your idea of perfection, or mine for that matter. Think plausible.

        Now, I admit competitive bidding is a stretch. But it did pass both houses of Congress last year, only to be undone in a reconciliation vote. It is not crazy to think it could pass again.

        We risk adjust now. We do it by fiat. I have suggested a way to acquire more information in order to potentially improve it. I have said there are many variations. One is a blend. Don’t fully trust the plans. Don’t fully believe the government’s current risk adjustment is optimal either. Blend them.

        • I am sorry to have disappointed you. I have been trying to understand how competitive bidding could reduce total costs (not just costs for some groups) and I just don’t see it. I am willing to consider PCMH and ACO and managed care, etc. which might reduce costs since these are ways of managing costs, not shifting risk.
          I have no ideal solution and have no idea of perfection. I do know that costs are obscenely inflated and there is rampant overuse of procedures of dubious value. This is the place to look for real savings. Shifting risk is a zero sum game except when you shift it to patients and then it is just immoral. Unfortunately, insurance companies have no way to drive down costs except to shift them to patients or ration care. Only the government has the clout to determine what is necessary care and prices.

          • Costs to taxpayers. (I’m going back on my word already, you see.) Paying MA plans less. Look at http://theincidentaleconomist.com/wordpress/competitive-bidding-simulated/ .

          • “Unfortunately, insurance companies have no way to drive down costs except to shift them to patients or ration care. Only the government has the clout to determine what is necessary care and prices.”

            Mark how is that you think that government can do this but private companies cannot? Do insurance companies not utilize managed care techniques to reduce costs? Do insurance companies not perform comparative effectiveness research? Maybe you think the government is better at it, or maybe you think the incentives are not properly aligned when a private company does it, but I think it is not at all correct to say only the government can effectively reduce health care spending. Market forces are no panacea, but the government picking winners and losers does not have a very good track record either.

            “Shifting risk is a zero sum game except when you shift it to patients and then it is just immoral.”

            The first part of that sentence is incorrect, and if you honestly believe the 2nd part you may want to reevaluate your opinion on some of the systems in other developed countries that you have spoken so highly of.

            There is a role for the government to play, and a role for private companies (insurers and/or providers) to play in managing health care costs and figuring out how to reduce spending. None of those other countries you talk about have figured out an ideal solution, and the ones that seem to be doing the best have a private/public hybrid.

          • I agree that the minimum bids are less than the average. However, if you base your payment on the minimum, then you won’t be paying the average cost. Your own article says it best:

            “That means MA plans and traditional Medicare would only be paid (subsidized) at the minimum bid level, as opposed to the much higher subsidy levels that exist today (more on that below). Beneficiaries would pay the rest. That’s how competitive bidding saves money. ”

            “Beneficiaries would pay the rest.”

            This would save money but would place an extra burden on the sick. This may be successful from an economic standpoint but is not acceptable from a health standpoint or a social benefit standpoint.

            My health care expenses for the past 12 months have been exactly zero dollars. Why not base payment on my experience which is a nice low minimum? This would save a lot of money.

            It would not cover the expenses of people who actually need medical care. If you want to destroy Medicare as a benefit, competitive bidding with these rules would do it. Perhaps that is what you want. I would prefer to have a Medicare program which provides better care to more people by reducing wasteful overpriced ineffective procedures. We don’t need to start forcing beneficiaries to pay more so that the health industry can increase its profits.

            Every other developed country provides better access and better health outcomes for about half what the US spends. It’s not a mystery how they do this. They control prices and unnecessary procedures. Only in the US do we protect the profits of the health industry at the expense of the health of the population.

            • Only a burden on the sick who choose not to enroll in the cheapest plan. Moreover, this was just an example. Subsidies need not be set at the minimum. Could be set at the second lowest or the average. Would save less but would provide more affordable options. Plus, there is risk adjustment and low-income subsidization. That affords a lot of protection against the problems that concern you.

              I think you are taking the details too seriously. A lot of this can be modified. The important point is to figure out a politically feasible way to economize on Medicare spending (we can’t keep doing what we’re doing) while protecting beneficiaries. Why should we pay MA plans 112% of FFS costs? So that beneficiaries can have access to whatever additional benefits plans choose to offer, many of which do not advance health and are not actually highly valued by the beneficiaries themselves? (I have research on this, have blogged it.) What is the standard Medicare benefit? Why should taxpayers pay for more than that? If they should, why isn’t the standard higher? How much debt should this country take on in order to pay Medicare benefits? Or, how much higher do you think taxes can go? (I’m not against higher taxes. I don’t see them forthcoming. Nor do I see them growing at the rate of health care costs. Do you?)

              I take offense to your implication that I wish to destroy Medicare. I am now 100% through with discussing these matters with you.

    • Austin
      You asked about “other problems.” Question.

      My guess is this something that can be worked around, but take s level 4, band with highest risk (costliest) beneficiaries.

      In submitting one bid, you are encompassing your entire risk pool, that is, however many enrollees contained a specific product line, ie, 10, 20, 50, 100K individuals, etc.

      As you break out the last band, where the tail of risk can extend quite far (? infinity), would plan size and willingness to play enter into equation?

      I could imagine smaller plans, or plans with higher percentages of transplants, etc., worrying about inadequate ‘n’ in that band, and thusly, bids would be less competitive.

      I dont think I am overthinking the problems with that last riak band, but mitigation and corridors for this costlier group may make the bidding effect and resultant treatment of this cohort a bit different.

      But I do overthink…sometimes.

      • Risk corridors, yes. This is not meant to be exclusive of other approaches. Question is: would this approach be helpful, relative to how things are done today? I think one would have to do much more quantitative analysis to answer that question. Given other feedback I’ve received, I’m satisfied that this is not a crazy idea on its face. It’s worth considering. That is, it is worth doing that quantitative analysis. Maybe there are big gains here. Maybe not.