Toward an efficient Medicare

My latest Kaiser Health News column is out. But before we get to that, let’s review:

  • In April, I lamented the fact that Congress didn’t produce a final health reform law that included competitive bidding for Medicare Advantage plans, despite a version of it having been in the Senate health reform bill. Instead, the ACA, as amended by the reconciliation bill,* perpetuates the program’s administrative pricing system, which has been subject to all manner of political meddling, costing taxpayers dearly.
  • A couple of weeks ago, I described how Rep. Ryan’s voucher plan for Medicare could cost more than Medicare Advantage because it is, essentially, a vast expansion of the program and wouldn’t protect voucher levels from political meddling either, something his staff confirmed.
  • Following that, I provided a set of required elements of a Medicare voucher program I would support.
  • In response, Reihan Salam, raised the issue of a level playing field between Medicare Advantage (or a voucher program) and FFS Medicare.
  • It matters a great deal what is meant by a “level playing field.” Bob Coulam described some interpretations.
  • James Capretta advocated more price competition for Medicare plans, without saying what that competition would look like, exactly.
  • I had two follow-ups to Capretta’s piece, essentially agreeing with him but without abandoning the obvious fact that politics had caused Medicare Advantage plans to consume more taxpayer dollars per covered beneficiary than FFS Medicare (which had been my point). I also wrote the following:

Beneficiaries do derive some benefit from the [Medicare Advantage] over-payments, but only at the rate of 14 cents on the dollar (that does not mean the other 86 cents is plan profit, more here). It is also true that there are some spillover effects. FFS costs may be lower when MA enrollment is higher, but to my knowledge, this has not been quantified with data more recent than 2001. A lot has changed in the MA program since then. The size of the spillover today is uncertain, as far as I know (happy to be corrected on this).

I’ve long thought that the best way to get the most out of Medicare is for the government only to pay for the plan type that works best–achieves the lowest cost for the standard benefit–in each market. FFS can do that in some markets and, perhaps, private plans can do it in others, particularly those where selective contracting yields large bargains. Today the government pays private plans more than FFS, whether they are more efficient or not.

That brings me to today’s KHN column. It explains how a Medicare that includes both private plans and a FFS “public option” can save money by harnessing the efficiency of competitive bidding with a level playing field, appropriately defined. Since a public-private hybrid Medicare seems to be a political equilibrium, taxpayers would be best served by using the two arms of the program more cost effectively. It begins,

Since the inception of Medicare, policymakers have wrestled with the problem of how the program can best pay for beneficiaries’ medical services. The result of this decades-long struggle has been increasing costs and a Byzantine set of payment methods. However, today’s Medicare includes the elements of a more efficient payment system. Ironically, that efficient system would be based on one of the program’s most complex and controversial features: its public-private duality.

Read the rest here.

For lack of space, and because it is a second-order (though potentially important) detail, I did not write about the possibility that spillover effects may exist, as mentioned above. Increased Medicare Advantage participation may change practice patterns that decrease FFS utilization and costs. To the extent such spillovers can be quantified market-by-market, they should be incorporated into the bidding system. For instance, private plans could receive an extra government payment bonus over the minimum bid, tuned to maximize positive spillover externalities. To the extent that bonus payments at least pay for themselves, taxpayers would be no worse off.

Also important, my commentary pertains to taxpayer costs. I’ve said nothing about beneficiary satisfaction or outcomes. Those are important elements too, the former politically so, the latter clinically. They must be considered as well in a full analysis of how to pay for Medicare coverage.

*Whenever I use “ACA” I really mean the totality of provisions from both bills.

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