• Limitations of competitive bidding

    Before anyone, including me, gets too starry eyed about competitive bidding among Medicare plans, it’s worth repeating its limitations. Igor Volsky expressed some recently, including that:

    1. Traditional (aka, “fee-for-service”) Medicare would be available but at prices varying by market. Some would consider that an inequity. Some would not, provided there was some plan — possibly a private one — offering the standard Medicare benefit available in every market at an affordable price to every beneficiary.
    2. Private plans may find ways to capture the good risks, leaving traditional Medicare holding the bag for the bad ones (meaning the relatively sicker and costlier beneficiaries). A lot is riding on risk adjustment. What would help improve risk adjustment is if private plan-based utilization data were made available to researchers in the same quantity and quality and on the same terms as it is available for traditional Medicare. We know a lot less about how private plans affect health care utilization and health than we should due to a dearth of research-ready data. One condition for competitive bidding could be better access to all data from plans subsidized by taxpayers (with all appropriate privacy protections, of course).

    To these I would add this, from a post long ago:

    Competitive bidding can save money, but it is not a panacea for all of Medicare’s ills, and it doesn’t address every issue associated with the program. It cannot tell us what the standard, required set of benefits upon which plans bid ought to be — only that we need consensus on such a benefit. It would mean that the beneficiary cost of fee-for-service coverage, as well as private plan coverage, would vary across markets, a feature some might consider inequitable. It also cannot, by itself, change the growth rate of health care costs. For that, further reforms to how fee-for-service and [Medicare] Advantage plans pay for care would be required, as well as changes system-wide, well beyond Medicare. However, bidding would ensure that taxpayers get the best value per dollar within the framework of the program’s hybrid public and private structure.

    Finally, as this post should make clear, I am sensitive to the concerns (largely from the left) that competitive bidding would spell the beginning of the end for traditional Medicare, a “giveaway” to private plans. One thing that might be considered (though I am not naive about the political feasibility here) is the addition of a Medicare-rate-based public option in the ACA exchanges as part of a competitive bidding package for Medicare. To the extent such an option was popular, it would be a countervailing “takeaway” from private plans and something attractive to the left. If this package were to come to fruition, we’d have an ACA system (which already includes competitive bidding) that mirrors the Medicare one.

    If that happened, the path to a more coherent and unified health system structure would be clear. The remaining major deviations from the public-private hybrid, competitive bidding, exchange/managed competition approach would be employer-sponsored plans and Medicaid. The removal of the employer-based tax subsidy, beginning with the Cadillac tax or something like it, would gradually address the former. The latter is a different story.

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    • So I guess my question, in regards to this and your previous post, is how does the Administration’s ACO efforts fit into this model? I’m struggling to reconcile the proposal for competitive bidding (most recently from Domenici and Rivlin) in a world where many want to move away from the traditional fee-for-service method.

      • ACOs are still paid FFS rates. They just get to keep some savings if they generate any and meet quality benchmarks.

        • Gotcha. For some reason I thought one of the possible outcomes of a successful ACO would be to transition to a flat-rate fee reimbursement system. Maybe I’m just confusing some wishful thinking I’ve read with the actual policy.

      • You are correct DdoubleP, ACOs who qualify for the Pioneer option will transition to a flat capitation fee in the 3rd year, provided they meet predetermined savings targets in the first two years. There are a couple of different “tracks” an ACO can choose (this is chosen ahead of time when they apply to be an ACO) that use this method. There is one track where the capitation is half of the expected costs and they still receive FFS payments (reduced by half of course) for the remainder, and another track where the capitation is for Part A services only, with Part B still using FFS. Yet another track uses a full capitation payment for all services, where the payment amount is set as the projected FFS costs reduced by 3-6% depending on quality scores, so in other words the ACO is guaranteeing at least 3% savings in that year,

        • Thanks for the correction. Back to the original question though, I don’t see how the payment scheme is (flat rate or FFS) necessitates a public plan. Private plans can negotiate flat rates too.

          • Yup, private/public doesn’t really make a difference for what payment scheme is used. Private plans today take capitated rates. I’m not too optimistic about the cost reductions here, because the starting point is still projected FFS costs, and even if an ACO that chooses one of the tracks with flat payments is able to dramatically reduce costs the savings would go to them and not taxpayers.

            If a given ACO thinks it can have a big impact, what they could do is manage care delivery to just barely hit the targets required to transition to capitated payments, and then when that kicks in you reduce costs and reap all the savings. It’s a cynical outlook, but I’ve seen what hospitals/providers are capable of so I wouldn’t be surprised to see it happen. If it can be gamed it will be.

            If a hospital group knows that they deliver let’s say for sake of example, 20% unnecessary/cost-ineffective care, you wouldn’t want to achieve those savings right away, because there is limited upside and then you’re also resetting your baseline to a much lower level. So you achieve just enough to hit the targets, and stop delivering all that unnecessary care in year 3 when capitation kicks in, and you reap all the savings. Savings to a provider just means lost revenue, so they’ll play the carrot and stick game, but they’re going to try to find ways to make those carrots as big as possible.

            • AB – Perhaps I’m simply confused on this, but then wouldn’t the difference between payment schemes decide who received the savings from decreased cost growth?

            • Yes, the distribution of savings depends heavily on the payment scheme. Once you transition to a flat payment if a provider can dramatically lower costs they get almost all of the savings, because they’ve been paid projected FFS costs less a 3-6% discount. Under the FFS arrangement with shared savings there is a cap on how much of the saving accrues to providers.

              A simplified example with numbers to illustrate: Say projected FFS costs for a given ACO are $1000 per member, but the ACO through better care management, care coordination, EMR, etc, can reduce those costs to $900. Under the shared savings program with FFS they would split that savings with CMS, with a cap of 60% (this is dependent on quality scores and which track they are in, but 60% is a ceiling in many cases), so they’d get $60 in shared savings payments per member, for a total reimbursement of $960 per member. Under the flat payment scheme they’d receive payment up front of $970 ($1000 x 0.97). So the provider comes out ahead if they can achieve greater savings than the predetermined discount in the flat payment scheme. It’s a modest amount in this example, but the bigger the potential savings the bigger the windfall under this plan. And since the ACO options that have flat payments only do so in year 3, and the projected costs will be based at least partially on costs from the first 2 years, there is incentive to not achieve the full savings until year 3, because the ACO will get to reap nearly all of the savings instead of sharing them.

              Again, it’s kind of cynical to suggest that providers will not try to achieve all possible savings until later years so they make more money, but financial incentives are real.

    • And what insurance company is going to take the most expensive part of the Medicare group: over 85; who produce the greatest costs? All this insurance babble does not address the real question: how do we deal with the 5 percent of the population that produces 50 percent of health costs?

    • A good Grand Bargain would be competitive bidding for Medicare in exchange for a robust national public option for those under 65 based on Medicare rates. However, competitive bidding would have to be carefully implemented to prevent private companies from taking the younger, healthier portions of the senior crowd and then dumping them on Medicare as soon as they get sick, which would destroy Medicare.

    • Excerpt:
      “Indeed, a market-based reform of Medicare like the one proposed here would require the repeal of Obamacare,”


      With or without ACA, a change such as this would require an act of a cooperative congress. Not a pro or anti-ACA sentiment, but the architecture of the law could remain, and Mcare function would need amending. It would also have budgetary implications, as MA change–which funds the subsidies, would need rethinking, but nonetheless, this would be no harder than designing as a standalone initiative.

      He is wrong I believe.


    • A better approach would leverage the Medicare negotiations and focus on the modernisation of payment system reform and changes in the delivery system.