• A Medicare Advantage plan walks into a bar

    Well, not quite. More like, a Medicare Advantage (MA) plan walks into the US Treasury (UST)…

    Under the current system the interaction goes like this:

    UST: Hi MA plan, how much will it cost for you to provide the standard Medicare benefit next year?

    MA: According to my calculations, it will cost $600 per beneficiary per month.

    UST: Great! Here’s $650. Keep the change.*

    Under competitive bidding the interaction would go like this:

    UST: Hi MA plan, how much will it cost for you to provide the standard Medicare benefit next year?

    MA: According to my calculations, it will cost $600 per beneficiary per month.

    UST: Ah. I see from my records that another plan you compete with can do it for $550. That’s all I’m giving you. You have to charge the remainder, $50/month, as a premium. Good luck!

    In the second scenario, taxpayers save $100 per month and per beneficiary enrolled in the MA plan depicted. Beneficiaries not eligible for low-income subsidies and who don’t switch plans have to pay $50 more in premium and they lose up to another $50 in benefits, depending on how much of the “change” in vignette one was converted to benefits (see footnote). You can’t get cost savings without cutting something. The standard Medicare benefit is preserved, however.

    One could rerun the two vignettes above replacing the MA plan with traditional Medicare. Under competitive bidding, if a plan can offer the standard benefit at cost lower than traditional Medicare, then that same minimal cost would serve as the subsidy for traditional Medicare as well. That is, beneficiaries would pay a higher-than-Part-B premium for traditional Medicare. Likewise, if traditional Medicare can do it cheaper than all plans, then the subsidy level for all plans is brought down to that of FFS Medicare costs. That’s the level playing field. Just think of traditional Medicare as another plan, since it is. However, in that case, the generous subsidy that traditional Medicare enjoys in some markets today is funding not richer benefits as we normally think of them (e.g. lower copays and deductibles) but an open network with unfettered beneficiary access to it.

    It begs a question, is coverage for nearly all physicians and hospitals with no barriers of access to them essential to the program? It’s not a part of the standard benefit since MA plans are permitted to selectively contract and manage care. I’ll leave you with this to ponder.

    * In fact, MA plans only keep 75% of the change and must spend it on benefits or premium rebates. The extra benefits are not worth as much to beneficiaries as their cost. This system will change somewhat in the coming years. But the basic structure remains.

    UPDATE: See the comments for some additional considerations.

    • My largest concern with any Medicare Advantage (MA) plan is whether competitive arrangements would be durable. We assume competitive advantage would be through the market mechanism but I suspect rent seeking is more likely. Major players would undoubtedly lobby both politicians and policy makers relentlessly to exclude smaller entrants and raise payment rates.

      Is there some aspect of this plan that would prevent it from meeting the same fate as the original MA?

      • The fact that subsidies are set competitively is one difference with MA that should afford some protection. Part D, which uses competitive bidding has performed well, with no political meddling in the bidding process since it began (such that I’m aware).

        Another layer of protection would be to put the whole thing under the preview of an IPAB-like entity.

        Ultimately, there is no such thing as full protection from politics. How could there be? But what I’ve suggested stands a far better chance than current MA or what Rep. Ryan has proposed. Those are very different. I hope that’s clear.

    • So what happens when the more expensive providers refuse to offer coverage at the low bid price? Do people have to buy higher priced policies or is there a guarantee that they will be able to buy the low bid price? (And they will need to have local coverage with their current doctors and hospitals.)

      • The bids are what they are based on current insurer-provider prices. The networks are in place, relationships established. A grocer doesn’t put a price on the shelf before knowing the cost of the goods to be sold.