Managed competition and competitive bidding

As noted in today’s Reflex, the AMA opposes “active purchasing” of insurance plans by the ACA exchanges. By the end of this post, you’ll understand why the AMA need not be so concerned.

Sabrina Corlette and JoAnn Volk explain the responsibilities and options for ACA exchanges as “active purchasers” of health insurance.

At a minimum, each exchange must have the authority to exercise its own judgment of whether a health plan’s participation is “in the interests of” consumers and employers in the exchange. The ACA permits exchanges to take on a wide range of activities to promote the availability of high-quality, affordable insurance products. These include, but are not limited to [… u]sing a selective contracting process to negotiate better prices and higher-quality from plans.

(There’s tons more. The paper is ungated.)

Elsewhere I’ve written how the ACA exchanges will be a market that includes competitive bidding.

[P]remium credits (aka, subsidies or vouchers) in the ACA exchanges are tied to the premium of the second cheapest “silver” plan. […] That’s how they harness a market signal, taking advantage of competitive bidding. Since potential enrollees pay anything above the subsidy with their own money, plans have an incentive to keep their premiums low, which, in turn, keeps the subsidy low — because it is tied to premiums (through the second cheapest silver plan).

But wait, how can an exchange simultaneously actively negotiate prices and still adhere to competitive bidding? Aren’t they mutually exclusive?

No. There’s nothing in one that logically or practically precludes the other. In fact, they’re complementary in one sense and redundant in another. Once the exchange has negotiated the lowest prices from plans, to the extent it is willing and able to do so, then consumers vote with their feet as to which plans to buy. For a given plan, consumers have some confidence they’re getting the lowest price possible, given the constraints of the exchange (more on that below). However, the consumer only receives a subsidy (voucher, if you like) of a fixed amount. It’s enough to make the second cheapest silver plan, and any plan cheaper than that, affordable (where “affordable” is according to the ACA’s income-based formula that converts that the second cheapest silver plan’s premium into a family-specific subsidy). Beyond that, the consumer has to pay more out of pocket.

That the consumer has to pay more to get more protects taxpayers from “over funding” lavish health insurance. That’s a complementary feature of competitive bidding, something that exchange negotiation can’t address. It’s also an incentive for the consumer to select less expensive plans. Insurers know that, and they’ll price their products accordingly. But the exchange, if it negotiates, should have extracted the lowest possible premium in the first place. So, in this sense, negotiations may be redundant.

However, exchanges need not negotiate. Even if they do, they may not have much power, as explained by Corlette and Volk.

The size of the exchange impacts its ability to exercise leverage. Even though the exchange will be the exclusive source of coverage for most individuals eligible for federal premium and cost-sharing subsidies, in many states it will represent a relatively small share of the total commercial market. And small businesses and individuals will have alternative options in the outside market. In addition, states that establish Basic Health Plans may draw from the exchange a significant proportion of its subsidy-eligible enrollees. As a result, it is important not to overestimate the exchange’s leverage to negotiate with carriers. […]

Negotiating price discounts from carriers will likely prove challenging for many exchanges. The fact that the exchange is not the sole distribution channel for insurance products could limit its leverage to negotiate prices with carriers. This is in part because the ACA requires that prices for the same products be the same inside and outside the exchange, meaning that any price discount negotiated by the exchange would have to be implemented in the outside market as well. For most carriers, the exchange won’t be a big enough book of business to justify such across-the-board rate reductions.

Actually, this blunts the effectiveness of competitive bidding in this context too. If it only exists in the exchange, it may not have a large impact. It doesn’t seem as if the AMA has much to worry about.


The post is over in the sense that I’ve made my intended points, but here’s a little bonus content via Walton Francis: The notion of an active purchaser goes way back, at least to 1980. In his book Health Plan (p. 144), published that year, Alain Enthoven writes,

What is needed is a body that would function more like the Civil Service Commission [predecessor of OPM], perhaps an independent commission in each state made up of representatives of employers, unions, and consumers. For CCHP to succeed, the gatekeeper must be as least as interested in getting good competitors into the system as in keeping bad ones out.

This is all somewhat related to Enthoven’s notion of managed competition. Double bonus content achieved by clicking through to that.

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