• The Seniors’ Choice Act

      02/16/2012
      Austin Frakt

    As Don blogged yesterday, Senator Richard Burr (R-NC) and Tom Coburn (R-OK) have introduced The Seniors’ Choice Act. It includes a variant of premium support and a whole lot more. As with all these things, the devil is in the details and not all the details are clear from what’s been released. Several documents describe various aspects of The Seniors’ Choice Act (h/t Avik Roy):

    • Main proposal document
    • Illustrative scenarios
    • How it relates to other, bipartisan proposals
    • Comparison of the Medicare Consumers’ Protection Agency to the Independent Payment Advisory Board
    • FAQ
    Here’s my quick reaction to some of the provisions:
    1. Add an out-of-pocket maximum.  An out-of-pocket maximum has long been sought and is one reason supplements are popular.
    2. Increased cost-sharing for wealthy seniors. Unify the deductible and cost-sharing across Parts A and B. Prohibit first dollar coverage by Medigap plans. I’ve bundled these together because they all pertain to cost-sharing. There are good reasons to reform cost-sharing under Medicare and Medicare supplements. However, it is worth considering how to do so to in a way that reflects the philosophy and the science of value-based insurance design. For example, it may be that nobody (even wealthy people) should pay cost-sharing for certain services because using them prevents future more costly care. It’s well documented in the research literature that copayments decrease utilization, which is the point but shouldn’t be the aim for care that offsets higher, future costs. Allowing some board to oversee how cost-sharing evolves as we learn more about the value of health treatments might be worth considering. Also, it’s not clear to me why Medigap isn’t just eliminated entirely and replaced with unified plans (either a beefed up traditional Medicare option or Medicare Advantage).
    3. Require millionaires to pay full premiums. More means-testing of premiums is a way to reduce costs to government but could also erode support for the program.
    4. Repeal IPAB. To be honest, I don’t understand what this is doing in the proposal. The very fact that Congress has been unable to reform Medicare in sensible ways is an argument for the IPAB. If the IPAB really proves problematic, why not repeal it later? I’d like to see it given a chance. Tit-for-tat repeal, and especially with no information on how the “other side’s” reform functions, doesn’t strike me as a sound way to govern.
    5. Increase the Medicare eligibility age. We’ve already written a great deal about this on this blog. In truth, this won’t save very much money, and, at typical rates of health care inflation, the savings will be overtaken in a matter of months. What do we do then? Raise the age even further? This just doesn’t seem to be a fruitful dimension for reform.
    6. Introduce a voluntary care coordination program. I’m not sure what this would involve. If it saves money and improves outcomes, maybe it shouldn’t be voluntary. I know that sounds harsh to libertarian ears, but we’re talking about a taxpayer financed program. Good stewardship may justify requiring care coordination for beneficiaries with complex, chronic conditions. Having said that, I am not familiar with the totality of the literature on whether coordination programs do, in fact, save money or improve outcomes. What’s the consensus? I do know that there are some programs that have failed to do either.
    7. Premium support with competitive bidding in 2016. Plan would bid regionally and traditional Medicare would be included among the plans. Plans would be required to offer benefits actuarially equivalent to the prior year’s Medicare benefit. The level of premium support would be “tied to” the (enrollment) weighted average bid, would be risk-adjusted, and vary by income. The arrangement would be overseen by a new Medicare Consumers’ Protection Agency. Note that setting premium support by a weighted average of bids will not save nearly as much as setting it at the lowest bid. The graph here, based on the work of Coulam, Feldman, and Dowd makes this clear. There are lots of strengths and limitations to competitive bidding premium support. You’ll find all the important ones covered in my series on the subject. Henry Aaron and I also wrote a NEJM paper recently in which we suggest we should let the current Medicare reforms play out before coming to any conclusion about whether premium support is appropriate for Medicare.

    The Burr-Coburn proposal does not include any type of backstop to ensure that the Medicare cost (spending) curve is bent. Moreover, it says that premium support is “tied to” average bids but doesn’t spell out what “tied to” means. (Or did I miss it?) Taken together, this could provide beneficiaries with a lot of protection (no cost shifting), but it’s hard to tell. Other recent proposals (Domenici-Rivlin, Wyden-Ryan) cap growth at GDP+1%, as does current law. Since no such cap is in the proposal and it uses a rather weak form of bidding (among other vagueness), it is not at all clear the Burr-Coburn plan would save anything relative to current law. This may be a liability in terms of obtaining a CBO score that would be viewed favorably by a Congress fixated on deficit reduction.

    In summary, the plan contains some ideas worth considering, some ideas that should be put aside, and not enough detail to really evaluate it. In other words, it’s a pretty typical proposal.

    AF

     
      Health Policy
      competitive bidding, Medicare, premium support
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  • Premium support proposal and critique: Reader comments

      12/18/2011
      Austin Frakt

    This post is part of a series. If you haven’t read the prior posts in the series, you really should. The introduction explains what I’m doing and links to all posts to date. Below are some of the comments from readers on those posts. I’m including them in a post because it’s my hunch that very few readers read the comments, and I want this to be as interactive as I can make it. I have responded to some of these comments, but I’m not including my responses here. For those, follow the links. Additionally, some of these comments are addressed in prior posts.

    By Mark Spohr on December 8th, 2011 at 09:25:

    I think you have set up a false set of constraints which help lead to your desired conclusion.
    – 1. TMs benefits cannot be enhanced.
    Why? There is broad popular support for more benefits. There are large areas of waste in the current system. There is even room for more taxes to support additional funding if you ignore the tea party/corporate wing of our politicians.
    – 2. Medicare is a public private hybrid.
    True but all of the private part is a mess. MA costs more than TM, cherry picks clients and wastes resources. It is a failure. The Medigap private policies are a confusing mess of overpriced and underperforming insurance plans. (I speak from direct painful experience just having spent several days with my brain exploding trying to figure out my Moms Medigap options.)
    – 3. Beneficiaries have heterogeneous preferences for coverage…
    Everyone wants coverage for their particular health needs and they want this coverage to include whatever future needs they may have. So in one view, yes, each person has different coverage preferences. But in a broader view, everyone has the same coverage preferences… everyone wants their health needs covered.
    Any attempt to divide coverage to tailor to an individual just introduces inefficiencies and moral hazard into the market.

    If you accept your constraints, you will end up designing ever more complex private health insurance schemes which will have the effect of confusing patients (costing them more) and enriching the health industry (which will be able to exploit the confusion and divided purchasing power).

    By Jeremy N on December 9th, 2011 at 10:28:

    I disagree that the optimal system should include only plans that provide the standard benefit. If the standard benefit were actually minimal, I might agree, but as it is, every year the governments (both national and state) add more and more requirements to insurance plans forcing them to cover more and more that only helps subsets of people. Is there another advantage to this requirement other than it “…maximizes beneficiaries’ ability to … compare plans.” Why is reducing the cost of comparison shopping more important than reducing costs, or providing an insurance plan that better fits their needs?

    Your points about private plans are well taken. First, there will be no transparency unless it is legislated. There is no incentive for providers to be transparent. Second, while it should reduce the costs of private Medicare plans, how well would it work fro private insurance for the non-elderly? The ACA incorporate some of this in some ways, but differently enough that I am not sure it is transferable.

    By Floccina on December 13th, 2011 at 11:45:

    I do not see how premium subsidies would help reduce costs. There are two things that could be done to reduce spending, lower prices and reduce consumption. If you offer people a subsidy to pursue some activity requiring an input that’s in more-or-less fixed supply, the price of that input goes up. So we need perhaps increase potential supply and reduce consumption. To increase potential supply we need to make it easier to supply the goods, one possibility is to make it easier to get licences to practice medicine (MD, RN, PA, NP etc.) and to eliminate rules as to who can do what. To reduce consumption more benefit needs to go to the person who forgoes treatment.

    Since it is a well-established fact that around 5 percent of the population accounts for about 50 percent of the costs of health care, wouldn’t the subsidies to those 5 percent be, frankly, astronomical? More to the point: what company in its right mind would want to take any of that 5 percent absent such an astronomical subsidy? How does this approach address the problem of the 5 percenters? If I ran an insurance company, I would be hell-bent on making sure that TM got that 5 percent and my company stayed far, far away from them as I would know that there is no way the Congress is going to pay such an astronomical subsidy for those 5 percenters. The only possible solution I can see is to require that every insurance company, including TM, take a certain number of the 5 percent. Otherwise, it would be easy to see a scenario wherein the 5 percent get, ‘magically’, placed in TM.

    By David R. on December 14th, 2011 at 12:32:

    The comment

    “That it is a problem requires one to believe that TM offers unique features that we must maintain (like these or these) even though competitive bidding would still ensure efficient provision of the Medicare benefit without TM in the mix. ”

    is correct with respect to TM, but does not explain what the unique feature of TM is. That feature is that TM has the largest and most diverse possible risk pool. This, along with the non-profit aspect of TM is why premium support cannot and will not work.

    Once this risk pool is broken up, TM will be left with the high risk enrollees, and their costs will rise. Unless they are highly regulated private plans will not offer insurance to an 85 year old person with chronic health problems.

    Everyone needs to focus on the risk management aspects of Medicare, but no one seems to want to do so. Is it that they just don’t understand the concept?

    “It’s not terribly hard to see why. Like it or not, US politics runs on money. Traditional Medicare (TM) doesn’t have any to lend in service of political campaigns or campaign issues. Insurance companies and those who work for and profit from them do. Sure, beneficiary groups like AARP could be a powerful force in support of TM, but I don’t think they’re any match for health insurers.”

    The notion that the trillions of dollars of money funnelled through traditional medicare isn’t distorted in ways that are calculated to advance the political fortunes and ideological committments of the people who control the purse strings is hard to square with the empirical record and pretty much all of public choice theory. To those who object to this claim I say, let’s start with John Murtha International airport, take a tour through the corn ethanol program, and then move onto the defense appropriations process.

    The reality is that it’s just as likely that people who want everything from an expanded role for government in the health sector to a full-on Canadian style single payer regime for ideological or political reasons would do everything in their power to rig the game against private particpants – and they have an inexhaustible warchest worth hundreds of billions of dollars per year *and* the capacity to engage in intimidation through regulation on their side.

    Here in Switzerland it is easy (maybe too easy) to change plans once each year. Organizations poll beneficiaries about perceived quality of the customer experience, and publish the results widely, especially during the open enrollment period.

    If a plan is aggressive about denying claims, or pays bills late, or has opaque billing statements, these facts quickly become known, and people vote with their feet. Since insurers are selected by individuals and not by companies, this phenomenon includes virtually the entire population.

    I sometimes think it is too easy to change plans. Some customers change plans every year, chasing the lowest possible premium (with decent quality). Such frequent changes have to add to administrative costs, and a period of bad luck with claims experience can put smaller insurers into a financial crunch.

    Apologies to those whose comments I did not include. Nothing personal.

     

     
      Health Policy
      competitive bidding, Medicare, premium support
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  • The Wyden-Ryan Medicare plan moves the ball, but which way?

      12/15/2011
      Austin Frakt

    As noted in today’s Reflex, Senator Ron Wyden and Representative Paul Ryan have jointly proposed a reform of Medicare that involves competition and private plans but differs from Rep. Ryan’s prior concept; it does not phase out traditional Medicare. The two legislators explain their plan in a Wall Street Journal op-ed today and their white paper with more details is available online (pdf). Below is a bit about their plan and the politics. Many questions remain.

    The Plan

    The following are some of the concepts proposed by Sen. Wyden and Rep. Ryan for a reformed Medicare. Their plan also includes reforms for workers of small businesses, which I will not discuss (much) in this post.

    1. No changes before 2022.
    2. Anyone age 55 and older today would never have to participate in the new plan.
    3. Private Medicare plans would compete with each other and with traditional Medicare in an exchange. Private plans must offer the actuarial equivalent of what is available from traditional Medicare.
    4. Plan premiums would be community rated. Plans could not reject a beneficiary from enrolling for any reason.
    5. The premium support level would be determined by the cost of the second cheapest plan or traditional Medicare, whichever is lower. Payments would be risk adjusted and geographically rated.
    6. If a beneficiary chose a costlier plan, (s)he’d pay the difference out of pocket. If (s)he chose a cheaper one, (s)he’d receive the difference in cash.
    7. Low-income beneficiaries would receive additional assistance, as they do today.
    8. Medicare growth will be capped at a GDP+1% growth rate. Cost growth above the cap will be brought in line by reducing “support for the sector most responsible for cost growth, including providers.”
    9. The white paper says that the Parts A and B deductibles of traditional Medicare should be combined and a catastrophic cap should be included.

    A few comments about these ideas: First, to many readers this should look familiar. It’s similar to the Domenici-Rivlin proposal and a form of competitive bidding, about which I’ve written a great deal. My ongoing premium support series includes similar ideas and critiques of them. With the exception of including a public option (traditional Medicare), the scheme is similar to the ACA exchanges.

    Second, it is not clear whether under this plan traditional Medicare can avail itself of all the payment reforms in the ACA, including ACOs, bundled payments, the IPAB, and the like. Moreover, it’s not clear how the provisions for workers (see white paper) mesh with the ACA. This is not some fine point. It’s absolutely essential that Sen. Wyden and Rep. Ryan be clear and specific about their ambitions for the ACA with respect to Medicare and the non-elderly. Their proposal cannot be fully evaluated without those specifics.

    Some additional points: Regarding #2 in the above list, I did not notice any discussion in the white paper about how exactly premiums for those 55 and older will be set. There are reasons to be concerned about #3’s actuarial equivalent standard, in contrast to requiring plans to offer a standard, common benefit. Briefly, the looser the standards, the more easily plans can compete on selection. About #5, it is not clear what “geographically rated” means. Will plans compete within local markets or will national bids be adjusted to reflect local costs? The former is more consistent with a market-based reform. The later inserts some administrative adjustments that will be prone to political gaming.

    Idea #6 is not an innovation since Medicare Advantage plans can already rebate the Part B premium, something the white paper fails to recognize. This is another aspect of today’s policy/political debate that is frustrating (to me at least). Many are not being completely forthcoming in how their ideas differ from current law. After all, we have a form of premium support with competition today. In the above list, only #5 offers something definitive and unambiguously new to Medicare.

    The ACA already constrains Medicare growth to a  GDP+1% rate, so #8 guarantees that the plan would be scored by CBO as no more costly than current law. Since the CBO is unable to score the dynamic effects of competitive bidding (but can score the static savings (pdf)), it probably would attribute some savings to the Wyden-Ryan plan. But it would be one-time (static), not curve bending (dynamic). Also, it isn’t clear to me how the spreading of pain among providers would be operationalized if costs exceed the cap. Item #9 is a noncommittal.

    The Politics

    As with any Medicare reform proposal, expect this one to generate substantial political debate. That’s appropriate, considering the stakes for the program and those who depend on it, as well as the competing claims of cost control supremacy by private plans or traditional Medicare. One key area of debate should be the extent to which traditional Medicare needs protection and preservation. It has the potential for large influence in dimensions of cost control in which private plans don’t typically lead. A private-side alternative has not been articulated. Related, why should a public option be universally available for the over-65 population but not the under-65 one? (See Aaron’s post on this.)

    Despite the questions, some things are clear. Rep. Ryan has moved leftward from his proposal last spring that would have eliminated traditional Medicare as an option for new beneficiaries beginning in 2022. Sen. Wyden has moved rightward from the standard Democratic position of preservation of Medicare as we know it since, in my view, a premium support proposal of the type offered by the legislators invites some risk of erosion of that arm of the program. I’m not suggesting that is Sen. Wyden’s aim since people can differ in their opinions on what premium support will do. I also don’t know the full history of his views of Medicare. Earlier today, Jon Cohn quoted the senator as saying,

    “I start with the proposition that, for millions of seniors and soon-to-be seniors, Medicare is the most important fiber in the social safety net. […] I would never do anything to shred it, or weaken it, or harm it in any way.”

    Thus, I presume Sen. Wyden aims to preserve the program, including traditional Medicare. (The senator co-founded the Gray Panthers, which is a pro-single payer organization.)

    Together, along with the Domenici-Rivlin Debt Reduction Task Force, Sen. Wyden and Rep. Ryan further the image that a proposal of this type is bipartisan, that it’s the natural, centrist compromise. Is it? A lot depends on details left unspecified. Will the concept survive the political gauntlet long enough for it to be fleshed out? At this point, we can’t know if a competitive bidding-based premium support program that includes traditional Medicare among the options is in our policy future. But that it could be just became a bit more politically feasible.

    UPDATE: I revised my characterization of what CBO can and cannot score with respect to competitive bidding.

    AF

     
      Health Policy
      competitive bidding, Medicare, premium support
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  • Ryan, Wyden, and the health care reform debate

      12/15/2011
      Aaron Carroll

    I have already answered my 10th email of the morning asking me what I think of the Ryan-Wyden plan for Medicare. The short answer is: it hasn’t been fully released yet, and I can’t comment on something until I’ve had the chance to evaluate it fully.

    But here are my gut thoughts based on what I’ve seen so far. I agree that – as described at the moment – this seems like it’s making Medicare more like the ACA in the future, but with a big difference. It sets actuarial minimums, it demands guaranteed issue and community ratings, it sets the subsidies by competitive bidding, and it allows for plan switching. But it’s different than the ACA in that it contains a fee-for-service public option.

    I expect that those who are dyed-in-the-wool single payer supporters will oppose this, as it can be seen as the first step towards dismantling traditional Medicare. I expect that those who are dyed-in-the-wool free marketeers will oppose this because it doesn’t do enough to dismantle traditional Medicare. But everyone else is going to be in a bit of a pickle.

    I’ve often been snarky towards those who think that a single payer system is American as apple pie if you’re 65, but communism if you’re 64 (I’m looking at you, Congress). But if this proposal picks up steam, it will flip things for many people. It will be hard to argue that the ACA is a viable, progressive solution for universal coverage if you’re 64, but free-market-heartlessness if you’re 65. And many who wholeheartedly supported the ACA will find themselves in that position moving forward. After all, this program even has a public option.

    Moreover, with Ryan’s support, many who want to repeal the ACA may soon be in a similar spot. How do you support this plan as a sensible solution for universal healthcare if you’re 65, but believe that it’s tyranny and the end-of-freedom if you’re 64? After all, the ACA doesn’t even have that public option.

    Now, if no other Democrats besides Sen. Wyden and no other Republicans besides Rep. Ryan support this, then they’ve just gone out on a limb, and nothing will change. But Ryan is not the most liberal of Republicans, and Wyden is not the most conservative of Democrats. I think it’s likely that others will sign on. When that happens, the whole dynamic of the discussion could change. That is, if the media is paying attention, and can learn to ask good questions.

    AEC

    Note from Austin: My post on the Wyden-Ryan plan will appear at noon. Many questions will be answered and many asked.

     
      Health Policy
      Affordable Care Act, competitive bidding, Medicare, premium support, Ryan, Wyden
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  • Premium support proposal and critique: Objection 3, accountability

      12/15/2011
      Austin Frakt

    This post is part of a series. If you haven’t read the prior posts in the series, you really should. The introduction explains what I’m doing and links to all posts to date.

    Another concern with premium support proposals, including the one I offered, is that private plans would be insufficiently held to account for their actions, quality, customer service, etc. The fear, as I understand it, is that private plans will not provide value, that when folks get really sick, the plans will do whatever it takes to not provide the care they need.

    I understand why people would worry about this. One of the ways a private plan can boost its bottom line is to shed high risk enrollees by treating them badly. Such a game of hot potato is clearly bad for the beneficiaries whose claims are denied or who experiences difficulty with the plan. Though I do not imply such plan behavior is excusable, it is nevertheless true that such behavior can lead to lower premiums. A claim denied is a claim unpaid. But, it begs a question, if plans do not care well for those who need coverage the most, what’s the coverage for? Low premiums may be appreciated, but of what value are they if, when push comes to shove, one cannot obtain the care one needs?

    Two questions come to mind about all this. First, how big a problem is it? I confess that I am not aware of the research on how plans treat higher cost enrollees. I am aware that there are many horror stories, but that’s not the same thing as research. I am certain some readers can point to good studies on Medicare plan quality (right?).

    Second, is traditional Medicare (TM) immune from such behavior? There is no explicit incentive, or even mechanism, for TM to put up barriers and deny claims. However, I wonder if that will change as TM begins to pay providers in more bundled fashions and provide greater incentives for lower costs. In the future, will TM beneficiaries be immune from accountability and quality problems normally associated with private plans? Will providers, acting on TM’s incentives, provide all the care that the sickest beneficiaries need?

    It probably occurs to everyone that there are ways to measure plan quality and to provide incentives for good scores. This is already being done for Medicare Advantage (MA) plans. I’m certain whatever is being measured is not complete and many elements of quality remain unobserved and without incentives. Note that TM is not required to report quality metrics and demonstrate adequate provider access as MA plans must. Thus, it is unclear how quality compares between MA and TM.

    Finally, the quality issues I’ve suggested in this post are related to risk selection. Providing poor quality to high cost enrollees is one way to achieve more favorable selection. Thus, greater attention to adequate risk adjustment and the monitoring of risk selection may address some quality issues. In some sense, if you want plans to attract and treat high cost beneficiaries well, you just have to pay them more for enrolling such beneficiaries. At some level of payment, plans should want to provide the highest risk beneficiaries with the highest quality. Put simply, sometimes you get what you pay for.

    AF

     
      Health Policy
      competitive bidding, Medicare, premium support
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  • Premium support proposal and critique: Objection 2, political reality

      12/14/2011
      Austin Frakt

    This post is part of a series. If you haven’t read the prior posts in the series, you really should. The introduction explains what I’m doing and links to all posts to date. I’m assuming you read them.

    Consideration of the likely political dynamics is another powerful critique of the style of premium support I outlined. Though in principle, one could orchestrate a program that provides a level playing field between private and public plans, in practice that may be hard to achieve or maintain due to political factors. Those factors are more likely to tilt things in favor of private plans.

    It’s not terribly hard to see why. Like it or not, US politics runs on money. Traditional Medicare (TM) doesn’t have any to lend in service of political campaigns or campaign issues. Insurance companies and those who work for and profit from them do. Sure, beneficiary groups like AARP could be a powerful force in support of TM, but I don’t think they’re any match for health insurers.

    Additionally, provider groups are more likely to support private plans since there is a perception they pay higher rates than TM. Not all of them actually do so in all markets, but relative to how Medicare rates are expected to trend under current law, private plans may ultimately be more generous than TM. So, all in all, there will be considerable pressure for Congress to tilt the playing field in favor of private plans.

    To some, this is obviously a problem because it would further erode enrollment in TM. That it is a problem requires one to believe that TM offers unique features that we must maintain (like these or these) even though competitive bidding would still ensure efficient provision of the Medicare benefit without TM in the mix. To others, political favoritism toward private plans is not a problem at all. It’s what they want. Is it any surprise the two sides don’t trust each other’s policy motives?

    Having said all that, there’s something a bit inconsistent about a claim that Congress won’t be able to resist political pressure from insurers and providers. If that is true (and, I believe it is), then the game is already over. In time those groups will eventually win. Look what’s happening in Medicare today. Private plans are as popular as they’ve ever been. That’s likely to change as payments to Medicare Advantage plans decline. However, they’ll probably be ratcheted up again by another administration (unless we go to competitive bidding). Even the current administration hasn’t held the line as tightly as they could have.

    Finally, a way to help with this problem of political meddling is to protect the whole arrangement by handing it over to an IPAB-like board. That won’t afford it perfect protection, but it should be some cushion from political forces since board members won’t be running for reelection and don’t need massive campaign war chests.

    Still, it will require future Congresses to support the IPAB-like board for all this to work. Why should they do that? Given all this, it isn’t hard to see why proponents of TM don’t want to endorse anything that increases the risk of its demise. It’s why a competitive bidding-type premium support concept is not appealing to them even if, on paper, it establishes a level playing field. Given politics, the field is not likely to stay level.

    AF

     
      Health Policy
      competitive bidding, Medicare, premium support
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  • Premium support proposal and critique: Objection 1, risk selection

      12/13/2011
      Austin Frakt

    This post is part of a series. If you haven’t read the prior posts in the series, you really should. The introduction explains what I’m doing and links to all posts to date. This post is the first of many that critique the premium support proposal I put forth earlier in this series. I presume you’ve read that, as well as the Q&A about it.

    Perhaps the most common attack on premium support that includes both private plans and traditional Medicare (TM) — as does the one I offered — is that it is a death sentence for TM due to risk selection. The concern is that private plans will find ways to attract relatively healthier and cheaper-to-cover beneficiaries (the “good” risks), leaving the sicker and more costly ones (the “bad” risks) in TM. Attracting good risks is known as “favorable selection” and attracting “bad” ones is “adverse selection.”

    Since plans compete based on their bids of per beneficiary cost, plans with favorable selection are at a competitive advantage relative to those with selection that is more adverse, like TM. If that happens, plans can bid lower than TM. The level of premium support, set at the lowest bid, will be insufficient to cover TM’s cost. Hence, TM will charge a premium. That premium will drive people away. If selection becomes more and more adverse for TM as people leave the plan, it could experience a “death spiral,” essentially going bust with premiums escalating to the point that nobody wants to enroll. TM would die.

    OK, that’s the concern. Now let’s go into it further. First, will private plans experience selection more favorable than TM? This is an easy question. They absolutely will in general if not for every single plan. The reason is that plans must earn more than cost to survive long term. Hence, they have an incentive to find ways to attract beneficiaries that are cheaper than the revenue they receive to provide coverage for them. The plans that fail at this game go bust. The same holds for TM. The ones that remain, by definition, have succeeded in experiencing favorable selection.

    One crucial difference, among many, between TM and private plans is that new private plans can enter the market while TM is just one plan. Moreover, private plans can change their nature (like extent of network, additional benefits, customer support, and whatever else is within the bounds of the law) much more rapidly and easily than TM. It’s akin to survival of the fittest where you’ve got one plan (TM) that adapts slowly, if at all, against essentially infinite plans (private ones that can enter and exit the market) that can adapt rapidly. There is no way private plans won’t experience selection more favorable than TM under these conditions.

    The next question, and this is harder, is, is this game over for a premium support program that includes TM? Not necessarily. What I’ve hopefully convinced you of is that the relatively sicker beneficiaries will tend to end up in TM and they will have to pay a higher premium for it. The difference between the TM premium and those of the private market is, essentially, a tax on sick people. If we can calculate that tax, that difference, we can compensate TM’s sick enrollees for it. That’s risk adjustment. That’s supposed to be part of the plan I sketched out.

    There are some who say you can never design a perfect risk adjustment system. That’s not quite true. What you can’t do is design a perfect prospective one, where you anticipate costs and adjust the level of support (plan subsidy) accordingly. Or, you can’t do it in the real world, anyway. Prospective risk adjustment still provides incentives for plans to manage costs. However, its not perfect risk adjustment because you can’t predict costs with perfect accuracy in advance, even for a population. Private plans will experience selection more favorable than that which can be addressed by prospective risk adjustment. TM’s selection will be more adverse.

    But you can always compute average costs in TM vs. private plans retrospectively and compensate beneficiaries (or plans) accordingly. If you find that risk is skewed beyond that controlled by the prospective risk adjustment system, it means you’re just not paying enough more for sicker folks. The solution is to crank up the payment for the sick and/or reduce it for the healthy. It could be done retrospectively to perfectly adjust for whatever differences in risk the two plan types experienced. Unfortunately, this also removes financial incentives to manage care or provide decent care. So, really, some blend of prospective and retrospective risk adjustment is needed. And that does leave open the possibility that private plans will be overcompensated and TM will be undercompensated.

    What else can you do? One thing is to not allow plan premiums to change more quickly than certain percentage (like 5%) per year. That wouldn’t solve uncontrolled selection, but it would slow down a death spiral, hopefully long enough to do something about it. Also, there can and should be monitoring of the nature of selection across the program. Plans that are experiencing selection far more favorable than is accommodated by the risk adjustment system should be ejected. Also, data should be made available to researchers to investigate selection and other aspects of the program. (Today, data on private plans is much harder to come by than that for TM.) Basically, there needs to be a full court press monitoring of selection and the ability to rapidly adjust the program if it is getting out of control.

    Still, what if selection is not well controlled or adjusted for? That’s clearly problematic for anyone who wishes to preserve TM. So, what else could be done, short of completely abandoning any type of premium support different from what we have today (which has many problems)? One could consider what passed both houses of Congress in 2009-2010, competition-based premium support for private plans only, leaving TM with administratively set subsidization. That’s exactly what the ACA included, until it was amended by the Reconciliation bill in March of 2010. That’s obviously a lot different than a program that has public and private plans competing head-to-head. It would tend to depress payments to private plans, relative to what they receive today. It would be a near death sentence for private plans (some would remain, but far fewer than participate in the program today). But such a firewall would provide considerable protection for TM.

    Bottom line: Selection could have consequences that many would find unacceptable and that wouldn’t bother others at all. There are things that can be done, but they may not be sufficient. Then again, they might be. Fully protecting TM from selection is possible, but leads to a very different program.

    AF

     
      Health Policy
      competitive bidding, Medicare, premium support
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  • Premium support proposal and critique: Proposal Q&A

      12/12/2011
      Austin Frakt

    This post is part of a series. If you haven’t read the prior posts in the series, you really should. The introduction explains what I’m doing and links to all posts to date. Below I answer some questions about the proposal I made yesterday.

    Q: Why do you assume that traditional Medicare (TM) cannot enhance the benefits it offers?

    A: That is one of the “stylized” constraints of this series, as stated in the introduction. “Stylized” means that it isn’t logically true but historically has been the norm. In particular, TM is very constrained by politics and, as such, is less able to do things that cost more. Where it excels is in innovation around payment system reform, because that reduces (or is scored as reducing) federal expenditure. (More on these points here.) That TM isn’t able to be innovative in the dimension of benefits, especially relative to private plans, is widely accepted among health policy experts. See, for example, this paper by Mark Schlesinger and Jacob Hacker. If there is one recognized health policy expert that disagrees with this, I’d love to hear from him or her.

    Q: Would premium support actually save money?

    A: Based on Medicare payment policy as it was several years ago, the best estimate we have is that premium support of the type I defined would save 8% of Medicare expenditures. Medicare payment policy has changed since then and private plans are now paid less. Relative to the current, lower level of payment, premium support would still save money, but not as much. Estimates are not yet published. Note that the CBO is unable to score a competitive Medicare program (at least right now), so by their metric, the premium support plan I sketched out would save nothing. Just because CBO would score it as saving nothing doesn’t mean that’s correct. I support additional research to develop sound methods that CBO could use to enhance its work in this area.

    Q: Isn’t premium support designed to shift costs to beneficiaries?

    A: No. The type of premium support sketched yesterday would not shift costs to beneficiaries for the standard Medicare benefit. All beneficiaries would have access to the standard Medicare benefit at an out-of-pocket cost no higher than any of them would pay under current Medicare plan payment policy. It’s true that beneficiaries wanting additional benefits would have to pay for them, with protections for those for whom doing so would be a financial hardship.

    Q: Won’t premium support drive benefits from the system?

    A: Unless the minimum standard Medicare benefit is redefined to be more generous, premium support would likely reduce the level of benefits provided by current Medicare Advantage plans. But those plans are overpaid at taxpayer expense, which is what supports those additional benefits. If we feel those benefits are of great value, then the standard Medicare benefit should be adjusted to reflect that, and TM should offer them. If we want plans to provide only benefits that are valued in the market and at a fair, competitive price, we can’t continue to pay them an arbitrary, high, administered payment as we do today.

    Q: Won’t premium support crush TM?

    A: In principle, that is not at all clear. In a critique later in the series I will explain under what conditions that could happen in practice. Note, however, that TM has many advantages. If one believes that TM provides good access to high quality care at prices lower than private plans, then one should believe TM should out-compete private plans. (More on this here.) Premium support could crush private plans, though that’s not a foregone conclusion either. Fundamentally, though, given how plans would be paid and the constraints under which they would operate, one should ask why one cares which plan type “wins.” What does “winning” mean in this context for beneficiaries? For taxpayers? (Think about it.)

    Q: But how can TM really compete against a wide variety of private plans? TM is just one thing and the marketplace of private plans would include considerable variation.

    A: This does put TM at a disadvantage. A few things would make the playing field more level, though. First, private plans must offer, and bid on, the same package of benefits as TM. So, with respect to that, they’re not different than TM. Second, though not mentioned in my proposal post, one could imagine TM expanding into more than one plan type, as well as offering enhanced benefits, including drug benefits and catastrophic coverage, in some of its variants. This too would level the playing field across the public-private divide. Note, however, that affording TM that degree of flexibility is inconsistent with its history of political constraint due to its oversight by Congress.

    Q: Isn’t this a complicated way to go about reducing payments to private plans?

    A: It is. But I would go back to the problem and goals sketched out in the introductory post. The goal isn’t to reduce payments to private plans, per se. The goal is to make efficient use of taxpayer and beneficiary resources while respecting the realities of and constraints that bind Medicare. One thing is clear: if the current administration reduces MA payments – which it is doing – the next one may well increase them. None of those payments will have any direct connection to actual plan costs, as revealed by a competitive bidding system.

    Q: If the primary goal is better care at better cost, as it should be, shouldn’t we first and foremost be demanding transparency not only from Medicare, but from private plans and providers?

    A: Yes. That’s why I would demand the release (with privacy protections) of all relevant utilization and benefit data so that the program administrators and researchers can police it thoroughly. More on this point later in the series.

    Q: Shouldn’t we make sure that, whatever we do, we do not jeopardize our ability to make payment and delivery system reforms?

    A: Absolutely. Payment and delivery system reforms should go forward. All plans should be able to decide how the pay providers and incentivize them for higher quality, lower cost care. TM should avail itself of any and all tools to do that (within the political constraints under which it operates). This is its competitive advantage and anyone who cares about good stewardship of taxpayer funds should not want it to give that up. (More here.)

    Q: Is premium support defined benefit or defined contribution?

    A: Confusion on that is borne from the vagueness of the term “premium support.” In fact, it can be either, depending on how the support levels are set. In the version I sketched out, it’s defined benefit, since support is always adequate to afford the standard Medicare benefit, albeit not necessarily from TM in all markets.

    Q: Won’t politics of the debt drive it toward defined contribution?

    A: That could happen, as could the erosion of Medicare in many other ways. We all know that Medicare is unsustainable in its current form. Many hope that payment and delivery system reforms will save it. If that’s true, that would hold under the premium support version I sketched out too, since TM would be permitted to implement those reforms. More on this point later in the series.

    Q: Isn’t this a heavy political lift?

    A: What about Medicare is not? So far, this series has not been a political analysis, but a technical one. I will consider politics later in the series.

    Q: If market-advocates think private plans achieve lower costs and public program advocates think Medicare does, why don’t both sides embrace head-to-head competition embodied in this style of premium support?

    A: Neither side trusts the other to not stab it in the back when it comes down to the crucial details. But that’s true of every aspect of Medicare, if not nearly every aspect of policy. Because of that, I am not optimistic the style of premium support I described will ever come to fruition. That doesn’t make it a bad idea. In fact, it’s virtues reveal how bad many other ideas for Medicare reform are. (More here and later in the series.)

    Q: Can’t we just decide based on what we know which works better, private plans or a public program?

    A: It’s just not that simple. Each plan type has advantages. I wrote about this last week. In brief, private plans innovate better in the dimension of benefits, traditional Medicare in the dimension of provider payment reform. Traditional Medicare’s cost controls may be effective, but they can also lead to problems (e.g., some have blamed shortages for Part B-covered drugs on low payments within that arm of the program).

    AF

     
      Health Policy
      competitive bidding, Medicare, premium support
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  • Premium support proposal and critique: Proposal

      12/09/2011
      Austin Frakt

    This post is part of a series. If you haven’t read the prior posts in the series, you really should. The introduction explains what I’m doing and links to all posts to date. This post is a proposal for a specific type of Medicare premium support program. I will answer questions about it and critique it later in the series.

    Any premium support that satisfies the goals listed at the end of last post must have the following specific features.

    Inclusion of private plans and a public option (traditional Medicare, TM). There is no reason to exclude TM from a premium support program. The whole point is for many plans to compete (in a sense defined below). TM has many features that make it an attractive player in a competitive market. By virtue of its large market share today (75% of beneficiaries) in some markets it can set prices below those of all private plans without alienating very many providers. (In others, some private plans obtain lower prices.) That translates into relatively lower taxpayer cost and cost growth, a virtue that should be maintained. Hereafter, unless otherwise specified, “plan” means either TM or a private plan. In other words, TM is “just” another plan. (Further reading related to these points here and here.)

    All plans must provide at least the standard TM benefit. Plans may innovate within whatever set of boundaries deemed sensible (I’m not defining them here), but must at least provide the standard TM benefit. Plans may offer additional benefits beyond the minimum standard. That benefit standard must include some notion of network adequacy. Plans can’t set payments so low so as to exclude too many providers. This holds for TM as well. Note that this puts a constraint on how low prices can go for any plan. Requiring all plans to meet one minimum standard maximizes beneficiaries’ ability to meaningfully compare plans. (Further reading on this point here and here.)

    Replace the current set of arbitrary premium support levels for TM and MA with a competitive bidding system. It’s important to recognize that we have a type of premium support today. I know of nobody who can say very many good things about it. In contrast to the administered pricing system that exists today, the level of premium support should instead be set, market-by-market, by some function of bids submitted by TM and private plans (e.g. minimum bid, second lowest, average). It’s simplest to think of the support level set at the minimum bid, but that’s not an absolute necessity. Setting it at the minimum bid protects taxpayers from overpaying for benefits, as some think they do today for MA plans and others think they do for TM. Setting support at a market, rather than national, level (i.e. tying it to the lowest bid locally, not nationally) accounts for geographic variation in health care costs.

    Bids reflect the plan’s cost of providing the standard TM benefit. Note that under any version of this bidding system, there is at least one plan that is as at least as affordable to beneficiaries as is TM today, however that plan may not be TM in all markets. Plans that cost more than the minimum bid or offer benefits richer than TM must charge beneficiaries a premium for that additional cost or coverage. Thus, inefficient plans suffer in the marketplace. Benefits that are of value to beneficiaries are likely to be offered even if they are not available from TM. However, beneficiaries would pay out of pocket for additional benefits. If this is considered unfair to beneficiaries or to TM then it suggests that the minimum benefit should be enriched. This brings front and center a debate about what the minimum benefits of Medicare should be, a stark contrast to the arbitrary variation of benefits available through MA today and the slow-to-update set of benefits available through TM. (More on these points here.)

    Provide low income subsidies. No beneficiary should be unable to obtain coverage for necessary health care due to income. Thus, the level of premium support should vary by income so that lower income beneficiaries can afford the coverage they need.

    Risk adjust premium support. Plans that enroll beneficiaries of higher (or lower) health risk should not be penalized (rewarded) for doing so. Hence, premium support should be risk adjusted. There is great concern among many that risk adjustment will be insufficient to prevent private plans from cream skimming. This is a serious and legitimate issue to which I will return later in the series. Whatever body oversees the program should use every tool necessary to address it including all manner of prospective and retrospective risk adjustment, risk corridors, risk sharing, reinsurance, auditing to check that plans’ actual costs are within reasonable bounds of risk-adjusted payment, etc. Plans found to be gaming the system on selection should be ejected from the program.

    Additionally, greater transparency should be required of private plans. The same level of information about utilization that is available from TM for the beneficiaries it covers should be made available by private plans. Researchers should have access to those data to they can independently check performance of the program, including analyses of selection (with all due privacy protections, of course). If a plan is receiving public funds, as they all would, the data that documents the use of those funds should be just as public as that of TM.

    TM must be afforded flexibility. Because it is governed by Congress to a larger extent than private plans, TM is unable to innovate in the same ways private plans can. This is unfair and unnecessary. TM should be liberated from such constraints and shielded from politics. The IPAB is a good model and something like it should govern TM, if not the entire premium support program. Moreover, all other provider payment reforms embodied in the ACA and any future ones dreamed up by the IPAB should be permitted to go forward. Despite what many pundits claim, those payment reforms are not the antithesis of a competitive program. That’s a false distinction. They are what will help TM be a competitive, cost efficient plan, one that could give private plans a run for their money. That should be encouraged. (More on these points here.)

    AF

     
      Health Policy
      competitive bidding, Medicare, premium support
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  • Premium support proposal and critique: Intro

      12/08/2011
      Austin Frakt

    This is a FAQ entry. See the main FAQ index for others. See also the related entry on competitive bidding.

    I’ve written a lot about Medicare premium support and a particular “competitive bidding” version of it. However, I recognize that it would be hard for anyone not closely following the blog to put together all the pieces from my posts (though, there is this FAQ, which should help some). Recently, I wrote something for an email correspondent that pulls together a lot of the concepts. I’m going to reproduce that here, in several posts. Then I’m going to write a bunch more posts that critique the ideas.

    Here’s how it’ll work. I want you to understand. To make it easier, I will write about a specific premium support proposal in my next post in this series. You won’t find that entire proposal anywhere else, but it draws from several other sources, notably the ideas of Coulam, Feldman and Dowd and the Domenici-Rivlin plan. I’m going to deliver this proposal as if I think it’s how the world should be. But don’t be fooled, because then, as I said, I’m going to critique what I wrote and tell you what the key issues are. Maybe the world shouldn’t be that way after all!

    As I do this, feel free to ask questions and make your own criticisms in the comments. I’ll answer questions in the third post and then turn to critiques. The ones I think have the most merit and/or are the most interesting, I will include in my critique posts. One more preliminary remark before I begin: There are a lot of variations on what I’m going to describe. “Premium support” is not one thing. For simplicity I will describe just one thing. Just keep in mind that it can be tweaked in many dimensions. Maybe some of those will come up in the critiques.

    Part 1 is about the problems I think premium support is supposed to solve and the goals for the proposal I will make. An index to subsequent posts appears at the end (hyperlinks to be added as the posts go live).

    ***

    Traditional Medicare’s (TM’s) benefits are uniform, but limited. It is natural for beneficiaries to want coverage beyond that available through TM today. For the program to provide greater benefits (e.g. lower cost sharing or coverage for additional services like dental or long-term care) invites two problems. The first is cost and the second, not unrelated, is politics. Cost itself has two components: the per person cost of the benefit enhancement and the number of beneficiaries covered. If the expansion is to occur through TM, all beneficiaries are covered (potentially crowding out coverage provided by other means: supplements and current Medicare Advantage (MA) plans), maximizing that component of cost.

    In some sense this is just silly accounting. If benefits are provided by other means but at higher per person cost (though they may not be), then moving them to TM, bringing them onto the federal budget, is actually cheaper overall. But then there’s the politics of the federal budget, including the debate over taxes and redistribution, which are severe. That cannot be denied. They generally preclude substantial enhancement of the Medicare benefit, particularly one that would require higher taxes to remain budget neutral. (The 2003 addition of a drug program, implemented in 2006, is the only major exception in the program’s history.)

    The other political reality is that Medicare has been a public-private hybrid program for decades. The degree of private plan participation is driven, in part, by the level of payment those plans receive, which is itself driven by the political winds. One may wish to drive private plans from the program, but it seems unlikely that will ever be fully accomplished. One may wish that TM “wither on the vine.” That too seems politically unlikely. The political equilibrium is somewhere in between. And, as stated above, private plans actually provide some things beneficiaries want that they cannot obtain through TM. There are reasons to maintain TM too.

    Let’s take all that seriously. Just because the TM benefit cannot be enhanced does not mean beneficiaries do not want additional coverage. Many do. Today, 25% of them obtain it through MA, which is largely taxpayer financed. MA has been notoriously overfunded through an arbitrary, Byzantine, administrative, and politically distorted system. There are good reasons to change how MA plans are paid. However, it cannot be denied that paying MA plans less will reduce benefits for beneficiaries that enroll in such plans. For many of them, there is no good substitute that does not cost more (e.g. Medigap). Thus, reducing public payment to MA plans is a cost shift to the beneficiaries enrolled or who would be enrolled in those plans.

    MA plans are subsidized, and so is TM, but according to a different system. Part D drug plans are on yet another subsidy system and I will leave them out, for simplicity, if not for other reasons. In this sense, a version of premium support (public assistance in covering plan premiums) exists today, it’s just not one anybody is likely to design for sound policy reasons. It largely serves political purposes. It’s natural to consider reform.

    The question becomes, how can Medicare move away from its current, arbitrary system of public and private plan subsidization and make efficient use of taxpayer funds and beneficiary premiums while respecting concerns of stakeholders and the following three (stylized [1] ) constraints? (1) TM’s benefits cannot be enhanced; (2) Medicare is a public-private hybrid; (3) Beneficiaries have heterogeneous preferences in coverage, including for benefits different from those offered by TM.

    One answer is to be found in a version of premium support, but one that satisfies many additional criteria beyond those articulated by many engaged in the current policy debate. Those criteria derive from respecting the legitimate concerns expressed in that debate. I will describe them in subsequent posts (see index below). Note that there is no goal inherent in the version of premium support I will sketch other than those expressed in the preceding paragraph. It is not a way of privatizing Medicare any more than it is already privatized. Instead, it’s a way of making Medicare more efficient while respecting its constraints and the interests of stakeholders. That alone distinguishes it from versions of premium support offered by others.

    If I succeed in convincing the reader that a version of premium support can satisfy the goals set forth above, then I will have revealed that many who claim that Medicare can either be a market-based system or one governed by government payment structures, such as those in the ACA, have offered a false choice. If my proposal has merit, then Medicare can be efficiently both. As promised, I will critique my own proposal. So I may succeed in convincing you and then unconvincing you. I may convince and unconvince myself. So be it.

    Start cranking out your questions and concerns.

    Index to posts in this series

    [1] By “stylized” I mean these aren’t hard and fast constraints. It’s not logically impossible for them to be violated. It is just historically and politically very unlikely.

    AF

     
      Health Policy
      competitive bidding, Medicare, premium support
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