Medicare Advantage benchmark

Reihan Salam has a nice post looking more closely at the cost of the current Medicare Advantage program and describing how premium support with competitive bidding in Medicare could work better to lower costs. He quotes Ezra Klein as saying competition hasn’t worked well to hold down costs in Medicare, and Reihan rightly points out that the way in which Medicare Advantage plans are paid by Medicare muddles this story. I would restate what Ezra said as private insurance options in Medicare have not worked well to hold down costs in Medicare. And it has everything to do with how Medicare Advantage plans are paid by Medicare.

Reihan notes that currently there is a county level benchmark that serves as the basis for how much Medicare pays private insurers who offer Medicare Advantage (MA) plans (if a plan offers a premium that is lower than the benchmark, patients get a rebate; if higher, they must pay the difference). So, there could be some competition in MA, but it is set around an administratively set payment. It is important to note that the county-level benchmark levels are based on historical Medicare Fee cost of Medicare in a county.

For the early history of private plans in Medicare (starting around ~1982, I believe implemented via a TEFRA 82 demonstration but I can’t dig it up right now) the payment levels from Medicare to private insurers were set at 95% of the average adjusted per capita cost of FFS Medicare in a given county. This did not save Medicare money because it turned out that generally healthier persons choose private insurance options, and were beneficiaries who would have cost less than 95% of the average cost in their county had they stayed in FFS Medicare. As you might guess, private plans proliferated in high cost areas, and often didn’t offer coverage in low cost ones. Payment rates from Medicare to private plans were boosted over time, with a goal of stimulating private insurance options and enrollment in same. Per MEDPAC on the current benchmark:

The benchmark is a bidding target. The local MA benchmarks are based on the county-level payment rates used to pay MA plans before 2006. (Those payment rates were at least as high as per capita FFS Medicare spending in each county and often substantially higher because the Congress set floors to raise the lowest rates to stimulate plan growth in areas where plans historically had not found it profitable to enter.)

The primary reason I have changed my mind and am willing to support a move toward a comprehensive competitive bidding option in Medicare (so long as it is in conjunction with implementing the ACA or a broader deal) is that I believe that private insurance options in Medicare will never go away for political reasons, and that the current MA approach systematically over-pays private insurance companies. Given my understanding of reality, competitive bidding has a reasonable chance of improving on the current (and longstanding) overpayment to private plans. Further, if we are going to do this, I see no reason to wait 10 years to start, especially given movement ahead on setting up insurance exchanges via the ACA, since the infrastructure necessary to implement both are similar. Perhaps a policy of saying competitive bidding in Medicare can start 2 years after a state sets up an operational ACA exchange could provide some incentive for “cold feet” states to move forward.

About Don Taylor
Professor of Public Policy (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute), and Chair of the Academic Council at Duke University . I am one of the founding faculty of the Margolis Center for Health Policy. 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

5 Responses to Medicare Advantage benchmark

  1. steve2 says:

    We have an awful lot of small, rural hospitals. How will competitive bidding work in these rural areas? I really dont see the private carriers being interested, or if they are just one coming in to avoid competition.


  2. Don Taylor says:

    I suspect you are correct and that one of the biggest questions I have is whether private companies will be interested in a bid without a net….or whether they will just collude and still bid around the old net. Lets assume it works well….my guess is large parts of rural USA will end up with only Medicare FFS and certain areas will have lots of private competition. I could imagine market share going down for private (total lives covered) but it working well in selected areas. All of this is speculation of course

  3. dennis byron says:

    You say and screenscrape:

    “”Medicare to private plans were boosted over time, with a goal of stimulating private insurance options and enrollment in same. Per MEDPAC on the current benchmark: “The benchmark is a bidding target…””

    Not positive but I think you are working with the pre-PPACA way Medicare Part C works. Try

    • Don Taylor says:

      you are right that more factors added by ACA most importantly quality…but my main point is that the historical FFS county avg still built in strongly and that areas with high benchmark more likely to have bidding action. The most interesting question if you went to competitive bidding based entirely on what bidders thought they could deliver bene package for would be in how many counties were their be choice and competition? Further, would they really bid on price or essentially collude on price and bid on other things? What if we build it and they don’t come? Some areas will just have only FFS Medicare and others will have choice of private plan, maybe with a bid mechanism that doesn’t overpay.
      Politically, Dems should press case (1) why are you for exchanges for elderly only? (2) if this is such a great idea, why wait 10 years. That is the least brave thing ever. The obvious deal is implement ACA, and then say in states running exchanges, we will do competitive bidding premium support starting 2 years later, using experience of ACA exchange.

  4. Craig Jaynes says:

    I could write a book on the difference between Medicare and the MA plans – have the latter and their incompetence and obvious attempts to fatten their bottom line are just pathetic. I will be changing at the first opportunity. Let’s face reality: companies will do what produces the greatest benefits to those who run them. PERIOD. Nothing else matters. I am also a hospice RN and watch with horror as For-Profit hospices take advantage of the public’s ignorance about the service (‘it’s all one big service’) and charge pt’s $20 for use of an over-the-bed table while refusing to pay for basic (UTI’s, non-terminal disease pneumonia) treatments or cherry-pick an area by promising ECFs extra, cost-saving goodies (quite illegal, but, oh, so obvious) and then getting ALL of the referrals from that facility. Oh yeah, getting private insurance more heavily involved is just what we need – a treatment guaranteed to kill the patient.

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