Office Hours: Competitive Bidding

Setting: my office last week, talking with an undergrad in my Intro to the U.S. Health System course.

Student: Have I got this straight? Everyone dies. Age is the strongest predictor of death and Medicare covers around 8 in 10 persons who die in a given year. Health care costs rise near death since people are sick. And within Medicare, a small proportion of beneficiaries account for a large fraction of total spending. Correct?

Me: Yes. But there is no guarantee a low user will remain low the next year. And since everyone dies, most eventually shift into the high use camp.

Student: You said that recent work that you had read has made you be more open-minded about competitive bidding in Medicare. This would mean private insurance companies covering some of the elderly, correct?

Me: Yes.

Student: We don’t make anyone choose private Medicare plans, right?

Me: Correct, it is their choice. And private plans are only available in areas that insurance companies desire to offer such coverage.

Student: It seems to me that the only way private insurance companies would be interested in Medicare business is if they can somehow only sign up younger and healthier beneficiaries and hope they go back to regular Medicare before they get very sick and die. If we have private options, it seems like the patient and the company should have to agree to stick together until the end.


I stuttered and stammered a bit on this one, in part because the insight of the student surprised me, but also because I have been trying to convince myself that competitive bidding can work. Two years ago, I really thought the Medicare Advantage program should be abolished even though I didn’t say it clearly here, because I thought it was nothing but cherry picking/selection. As I have said before, Austin has done lots to convince me it is possible for competitive bidding to work with private insurance alongside a government Medicare option. I still believe that it is possible in theory.

However, in some basic “gut” way it just doesn’t make any sense that a private insurance company would be interested in seeking great market share among the elderly if there was a truly competitive situation brought about. My recent writing about the Federal Flood Insurance has helped to crystallize these thoughts. Sometimes there may just be risks that only government can undertake, and the only question is whether the benefits of the government doing so outweigh the costs. My head believes competitive bidding can work in theory, but my heart/gut is not so sure in practice.

Update: nice post from Austin this am; I would add that my heart/gut reticence is based on ability of private to reduce costs. Maybe wrong metric. Want to see the below study….

What I would like to see: a long term case control study (10 years!) starting with a representative sample at age 65 that tracks a cohort of people moving in and out of Medicare Advantage and FFS Medicare (and death) as well as comparing patients by overall spending (say by quintiles). I don’t think such a study has been possible because Medicare claims don’t exist (publicly?) for those in Advantage plans. We need such a study.

update: from Austin via email ” The point is not that competitive bidding certainly beats a public plan (though it may). The point is that it is a way to economize within the current political equilibrium of a public-private hybrid Medicare. It’s better than that status quo and has elements that should appeal to the left and right, as I’ve explained in posts.” Let me add that I personally believe that a political deal on some way forward on health reform is what our country most needs to have any hope of developing a sustainable health care system and federal budget; I suspect this could be part of such a deal and noted that in my book.

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