What must plans offer under competitive bidding?

A long-ish post on a very important issue.

Quick review: Under competitive bidding among Medicare plans, private health insurers and traditional Medicare would offer bids (their cost) for providing a defined benefit to an average risk beneficiary. The government would then set subsidies (premium support) at some level that is a function of the bids (like the minimum, second lowest, or average). To enroll in a plan that cost more, a beneficiary would pay more  out of pocket. If a plan cost less, a beneficiary would pay less, possibly keeping the difference as cash. There are other important details (risk adjustment, low-income subsidies, and the like), but this is the basic set-up.

Where I want to dig deeper in this post is on the defined benefit on which plans bid. What is that, or what could it be? And what are the pros and cons. Below are two possibilities with some thoughts about each.

The current traditional Medicare benefits package. Requiring plans to bid on the current traditional Medicare benefits package is the administratively simplest idea. It’s also what Medicare Advantage plans must, at a minimum, offer today, so CMS is familiar with managing such an arrangement. Sure, plans can offer additional benefits, though beneficiaries would have to pay more out of pocket for them under competitive bidding.

The chief advantage here is simplicity of comparison. All plans at least offer a core set of benefits. To the extent they vary, it is on additional benefits and quality, broadly defined (e.g., including customer relations, extent of network, etc.). Making comparison easy is a hallmark of a good market. In fact, you don’t achieve competition without having comparable plans. To maximally empower the consumer, you need to give the consumer choice among similar products. (Note that a variant is to permit a few standardized product types, much like the Medigap market.)

Another advantage is that an equivalent minimum benefits package is as close to a level playing field between public and private options as one can get, in terms of benefits. One of the concerns voiced by both private and public plan advocates is that the playing field will be tilted. To the extend that can be avoided through how the market is defined, that concern is reduced.

A disadvantage is that forcing plans to offer a standard package reduces the range of potential innovation. The whole point of having multiple products is to foster innovation. Clearly there is a tension between innovation and ease of comparison. With a standard package, all the innovation is in additional benefits and quality. Plans cannot innovate by reducing benefits. Perhaps some benefits (some treatments) should be “innovated away” due to their low value and/or high cost.

An actuarial equivalent standard. If maximal innovation is your goal, a way to get it is to define the minimum benefit as an actuarial value. A plan must cover at least 80% of health care costs or of those of the standard Medicare benefit, say. But what specifically it covers and how is left flexible. Plans can innovate with more benefits in this dimension, less in that. This is the way to get some truly interesting, and possibly very valuable, products. This is basically how plans are constrained within ACA exchanges, though there will be a list of “essential benefits.” (Also, the exchanges will not include a public option.)

Many people call this type of freedom “competition.” It really isn’t in the sense we should want. It’s a way for plans to achieve market power by differentiating themselves from other products. In some sense you don’t have one market but many. Each plan defines its own market space, it attracts its own segment of consumers. With low overlap among products, consumers can’t easily shop. There are few substitutes among plans.

Another concern with this approach is that what you get is innovation not in services and benefits but in selection. Plans have more freedom to craft their offers to attract low risk beneficiaries. In some sense they are competing with other plans, but not in a way you’d like. Competition for the best risks — cream skimming — is not what we should want to promote.

Finally, this strikes me as a heavy tilt to the playing field. Due to constraints by Congress — ones I cannot see them lifting — traditional Medicare cannot innovate any where near as rapidly as private plans. That’s a criticism of traditional Medicare. That’s why you want private plans. (Example: Congress did not permit Medicare to craft a universally available drug program until well after drug coverage was a standard offering by private plans.) At the same time, if you don’t find a way for both types of plans to innovate similarly, the playing field is tilted. Either traditional Medicare needs a different governance or private plans must be constrained in their ability to deviate from what traditional Medicare can do.

I know that sounds like throwing the baby out with the bathwater to many, but to others allowing private plan innovation to strangle traditional Medicare is far too frightening to contemplate. Clearly this is the crux of the inside game on competitive bidding. If the rules can be crafted to slightly benefit one side or the other or to remove what one side or the other finds crucial, we have a political obstacle to implementation. I’m glad it is not my job to sort this out, though I’ll do my best to help.

Question: To what extent was this thought through for an ACA exchange public option? Specifically, how was the public option to be governed so it could innovate on something like the time scale of private plans? How was the playing field to be kept level with regard to benefits?

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