More on Competitive Bidding in Medicare

Reihan Salam rounds up some of the thinking on competitive bidding in Medicare, spurred on by a new paper in JAMA* that finds that if you used the second-lowest bid to set the amount of government support of both traditional Fee For Service and private insurance-based Medicare, that on average the federal government’s cost would be around 9% lower than traditional Medicare, and around 14% lower for current private insurance Medicare. Reihan links to Austin Frakt’s noting that this means that premiums will either be shifted to beneficiaries, or some other dislocations will take place in terms of finding efficiencies of some sort (that will mean someone will get paid less and/or less care be delivered)…but of course the point is to shake things up a bit.

The current Medicare Advantage program (private insurance option for Medicare beneficiaries) has an administratively set benchmark that specifies how much the federal government pays insurance companies if beneficiaries choose to be enrolled in private plans; under premium support proposals such as Wyden-Ryan and others, a competitive bidding process in which market competition set this benchmark would ensue. Beneficiaries choosing more expensive plans (even if traditional FFS Medicare) would have to pay a larger premium, and those choosing lower cost plans would get a rebate.

I have changed my mind quite a bit on competitive bidding the last few years, driven in large part by my view that some sort of private insurance option in Medicare will persist, as will traditional fee for service Medicare. That leaves me wanting to do a better job of getting value for money in whatever private insurance options we do have for seniors, and competitive bidding is worthy of a try under the correct circumstances. However, my biggest question is this:

  • in what geographic areas will private insurance companies submit a bid for private Medicare if the premium support amount is set by competitive bid and not an administratively set amount?

I assume insurance companies will still be allowed to pick and choose by county whether they will offer their products or not. Is this correct? Will they offer products where they now offer Medicare Advantage plans? In fewer places? In more?

*Zirui Song, David M. Cutler, Michael E. Chernew. Potential Consequences of Reforming Medicare into a Competitive Bidding System. JAMA 2012;308(5):459-460.

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

6 Responses to More on Competitive Bidding in Medicare

  1. dennis byron says:

    What’s to be concerned about? If no one else bids in a county, traditional Medicare will be there (and be free I guess). However, even though the benchmark is not set bureaucratically set, it will be known.

    As far as the Harvard research, it’s totally bogus in my opion and not a worthy contribution to the discussion of Wyden-Ryan and competitive bidding in general. It misrepresents the Wyden-Ryan proposal, doesn’t seem to understand how the Part C benchmark/bid/rebate mechanism works today, ignores Medigap and employee retiree insurance, etc. and even transposes Wyden’s and Ryan’s names apparently as a political statement.

    And to boot the claim that Gramma would have paid “$64 additional” under Wyden-Ryan in 2009 appears to be wrong (based on the authors’ own description of Wyden-Ryan). Since I think the whole research is bogus I didn’t spend a lot of time looking at this nit but if Part A/B would have only cost Gramma $64 in 2009 under Wyden-Ryan, she would have saved $32 vs. the $96 she actually spent.

    (By the way, I think you are the person who told me the then status of the bridge to Salvo on another blog, no? We went back to the OBX this year but chose Duck and north of there rather than heading south.)

    • Don Taylor says:

      I am mostly thinking of how ironic it would be if the blood ran ankle deep on trying competitive bidding to set premium support level and there was little interest of private insurance of bidding….and we need to take some steps to address cost inflation, quality and value for money. In the NC context, my guess is that over time, many rural areas would have no one bidding to offer a plan, while there would likely be some competition in the Research Triangle area, Greensboro/Winston Salem and Charlotte.

      A further question is whether any private Medicare option being palatable to private insurance is for a small enough fraction of the population to sign up to allow them to benefit from selection effects of healthier folks selecting into private plans. The details are the key for any premium support proposal, and the options for how/whether/when individuals select out of private options back to FFS Medicare are very important.

      I think the study is interesting in that it shows quite a lot of folks chose plans above the second lowest option, however, the stakes were not the same in the premium setting exercise….and of course Wyden Ryan is not even in legislative language so there is a lot of filling in the blanks required to try and do any modelling of it.

      I was blogging about the OBX bridge last summer, on incidental economist where I used to blog. That bridge is great for teaching cost/benefit analysis….

      • Dennis Byron says:

        Two points.

        1. You say:

        “A further question is whether any private Medicare option being palatable to private insurance is for a small enough fraction of the population to sign up… and the options for how/whether/when individuals select out of private options back to FFS Medicare are very important.”

        I find that a lot of academics — with your friend Austin as their leader — do not seem to factor in that TODAY, NOW, AS WE “SPEAK,” HOW MANY WAY CAN I SAY THIS — less than 8% of Medicare beneficiaries depend on FFS Medicare (see 2012 MedPAC Data Book-Section 2). Over 80% of us choose private options, already. Another 10% have to use Medicaid. There will be no stampede “back to” FFS Medicare.

        2. You say

        “I think the study is interesting in that it shows quite a lot of folks chose plans above the second lowest option…”

        I am surprised that you seem to have no problem that the Harvard study is fatally flawed to the point that you should not draw any conclusions from it (misinterprets C benchmark/bid/rebate process, totally misrepresents Wyden-Ryan, even misinterprets its own data claiming $64 a month increase when there is a $32 a month reduction). Is it some kind of professional courtesy to another professor sort of thing 🙂

        (OBX: Didn’t make it down to Salvo area this year. Since we had done the Hatteras lighthouse last time, we went up and did the one almost into VA. .Speaking of stampending “back to FFS Medicare,” I must say we were disappointed with the OBX wild horses. Kind of expected a thousand horses full gallop across the dunes sort of thing rather than a couple of ponies eating some guy’s lawn.)

      • Don Taylor says:

        Fair point about folks having gap insurance either purchased or provided as a benefit of employment. However, I think it is a pretty big difference if a private insurance company is taking on the risk of all care for the elderly. The details of what a competitive bidding plan looked like would be really important. Can private insurers leave selected markets? Once they sign someone up do they have to stick with them? I do doubt that private insurance wants any part of taking on 100% of the responsibility for insuring the elderly given how costs aggregate near death. I don’t think we will ever find out though, and suspect selection will remain the key. However, I do believe a private option can be done better than it is now, so am willing to move that way.

        As for the study, I don’t see how it is fatally flawed…and it is quite a general comparison anyway that simply said lots of folks have a plan now that costs more than the second lowest bid. Can you be more specific about what you think they have wrong

  2. dennis byron says:

    In my earlier comment, I said the benchmark “will be known.” Sorry, I meant the Medicare costs will be known, which a private insurer would use to structure its bid.

  3. dennis byron says:

    You say:

    “As for the study… it is quite a general comparison anyway that simply said lots of folks have a plan now that costs more than the second lowest bid. Can you be more specific about what you think they have wrong”

    The Harvard study is fatally flawed in one way precisely becase its comparson is not general. It claims to compare how “traditional Medicare” (see NOTE) would have fared under Wyden-Ryan in 2009, not how premium support would have worked “in general.” But Harvard makes major errors in understanding the Wyden-Ryan proposal and therefore major errors in fairly comparing the likely outcomes. Most important of this set of errors: the Harvard research does not acknowledge that Wyden Ryan adds catastrophic coverage to “traditional Medicare” and proposes to change (in some way not made clear by either Wyden or Ryan) the Part A/B co-pay structure. This alone makes the research flawed and unable to reach the conclusions Harvard claims because it makes no estimate of what “traditional Medicare” would have cost in 2009 with these new features. Instead it uses the amount non-Wyden/Ryan “traditional Medicare” actually cost.

    Worse the Harvard research then apparently mistates the result of its own unfair comparison. Based on the Harvard research’s table, “traditional Medicare” would have cost $32 a month less per month under Wyden-Ryan than it actually cost in 2009, not $64 more as the Harvard authors wrote. This is because — according to the Harvard research itself — the monthly Medicare cost was $717 (but see paragraph above) and the second lowest bid was $653. The $64 difference — what it says would be the premium for “traditional Medicare” under Wyden-Ryan — is $32 less than the actual $96 premium for Part B in 2009.

    (NOTE: I am assuming the Harvard researchers mean Parts A and B when they use the term “traiditional Medicare.” Not being clear about that makes it bad research. Also because the research is so flawed and so cursory, I’m assuming the Harvard researchers did not look at the implicit premium for Part A in its comparison and that I should use the actual 2009 Part B premium of $96.40 to compare against the hypothetical premium.)

    Furthermore from a more general perspective (but see my earlier comments on your original post about retiree insurance and Medigap), the Harvard research is additionally fatally flawed because it ignores 70% of the Medicare market, everyone that is not on Part C but that is on other private, mostly FFS, insurance instead.

    It is just bad research. If it was done by a group of your students, you’d send it back for more work.

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