The CBO report on premium support

You can download it here. I don’t have it in my to go over premium support mechanics again, but you can read all about them here. I’ll just note these two assumptions, among others, that inform the CBO’s analysis (bold added):

CBO expects that, under either premium support option, private plans would experience greater favorable selection (beyond that captured by risk scores) than they will experience under the Medicare Advantage program. That is, people who enrolled in private plans—under either option—would use fewer health care services, on average, than people with the same risk score enrolled in Medicare Advantage. CBO anticipates that outcome because increased competition would prompt insurers to take more aggressive steps to control costs (by enhancing utilization management or using tighter provider networks, for example), thus rendering private insurers less attractive to beneficiaries who would, on average, use more health care services than would other beneficiaries with the same risk score.

I totally buy this, as I wrote in my series. Next,

CBO estimates that in most counties the percentage of beneficiaries enrolled in the FFS program would decline once either premium support option took effect. In CBO’s assessment, the reduced market share of the FFS program would tend to boost the rates that private insurers paid to health care providers and thereby lead them to raise their bids. That reduction in market share, and thus the effect on private insurers’ bids, would be greater in areas where average FFS spending was high.

I’m having some trouble with this one. I do understand that, to attract more enrollees, private plans would have to extend their networks, which would require paying marginal hospitals and providers more. But that’s not the case for the inframarginal ones. Moreover, why doesn’t a plan that attracts more enrollees have more market power with respect to hospitals (both marginal and inframarginal)? Wouldn’t that suggest lower prices?

I read the details in the report that follow, but they didn’t help me with my fundamental objection. There’s a lot of verbiage about the (non-Medicare Advantage (MA)) commercial market paying higher prices than MA or FFS. The idea seems to be that Medicare private plans would tend to resemble the commercial market, if not for FFS. Hence, prices would go up if FFS became less of a threat, as it would under premium support.

This may be true, but not enough was said about why. The commercial market and the Medicare one serve different consumers, are challenged by different competitors, and are constrained by different regulations. They are different markets. Why should prices in one have any relation to those in the other?

One mechanism is that they are linked by the provision of coverage for the same providers. Therefore, to the extent a provider can, it would want to serve customers of a higher priced plan more than a lower priced one. I.e., it would tend to favor commercial market plans, provided it could get enough volume from them. If this became an access issue for Medicare beneficiaries, it could push prices upwards for Medicare plans.

But doesn’t this dynamic already exist today? It must, to some extent. However, maybe today it is counterbalanced by the force exerted by FFS Medicare. FFS Medicare, with which MA plans compete for enrollees, could be exerting downward pressure within the Medicare market. To the extent that the threat from FFS weakens under premium support, perhaps Medicare private plan prices would go up somewhat.

But, this ignores the fact that commercial market plans and Medicare plans can be offered by the same insurance companies. Each company is trying to maximize profit over all its products, jointly. A firm could well conclude that it makes more sense to lower its commercial market prices than raise its Medicare plan ones. Of course, those provider prices translate into premiums, so the right move depends on the changes in enrollment it’d experience in each market.

Moreover, insurance companies aren’t generally price setters. They must negotiate with providers across their products. This is all further complicated by the fact that each firm competes with others, and not all of them exist in both markets.

What will really happen to Medicare private plan prices under premium support? I find it exceedingly difficult to game it out. I’m not convinced CBO is correct that they’ll go up.


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