Private Insurance in Medicare: Language and Details

One barrier to reasonable discussion of the important details for any private option in Medicare is language. Premium support, competitive bidding, vouchers are thrown around willy nilly. Sometimes the words are meant by speakers to be self-evidently bad, other times good–what does it all mean?

From chapter 7 of my book Balancing the Budget is a Progressive Priority on the future of private insurance options in Medicare comes this (bolding added here):

I distinguish three approaches to purchasing private health insurance with support from the government to defray the cost. They may seem similar, but are very different in reality. And within each of these three varieties noted below, there are innumerable policy distinctions that could be made. Within the broad category of premium support, the version below that I term competitive bidding is an idea worth trying, in both the elderly and non elderly population. The other two are probably not.

The first approach is the use of an Equal Value Voucher. An equal value voucher is when everyone gets the same amount of money to go and purchase health insurance. The main effect of such an approach is to fix the total cost to the federal government, and essentially to shift cost differences to individuals. This is not being actively proposed by anyone as a Medicare policy, but this is similar conceptually to block granting the Medicaid program to the states. The federal government would fix their cost, and shift the remainder to the states in the case of Medicaid, or to the patient if you had an equal value voucher proposal.

The second approach is an Administratively Set Voucher. This is where an amount is provided to people that enables them to purchase private health insurance, but the key detail—how much money is provided to purchase insurance—is set administratively as opposed to by market forces. The current Medicare Advantage program, and really all earlier variants of Medicare HMOs were administratively set vouchers. The amount of money provided was determined in relation to the average adjusted per capita cost (AAPCC) of Medicare in a given county; it was set at 95 percent of AAPCC for two decades in an attempt to reduce costs until the mid-2000s, when the amounts were greatly increased with a policy goal of increasing participation in private plans. However, the amounts were still administratively determined. A company that could provide care cheaper than the value of the voucher simply pockets the difference as profit.

Rep. Paul Ryan’s plan passed by the House in April, 2011 to transition over time away from the current Medicare program and toward a system of providing money for the elderly to purchase private health insurance is also an administratively set voucher program. In fact, his linking of the amount provided to the elderly in the future to purchase health insurance to overall inflation, which grows much less slowly than health care inflation, shows what can happen with an administratively set voucher program: the value and therefore purchasing power of the voucher would greatly erode over time.

Competitive bidding occurs when the amount of a voucher provided to a patient with which to purchase private health insurance is determined by the actual cost of an insurance policy that covered a set of services (defined benefits) in a given health care market. This price would differ by market, and would be set through competitive bidding, in which insurance companies were each seeking as much business as possible. Setting the voucher amount at the price at which the lowest bid company was covering the specified benefit package would incentivize other insurance companies to aim to provide better care for less money and therefore gain market share. Insurers could compete on provider network, wellness programs, or internal efficiency. If insurers charged a higher premium than this competitive bid standard for a given area, the patient would have to be willing to pay the extra amount if they wanted to sign up for the higher priced plan, as the government would only pay the lowest bid amount in a given market. If properly constructed, cost could drop and quality could increase.

The ACA exchanges are the closest thing we have to competitive bidding at this point, although there are worries that the premium subsidies provided in the out years could erode under some circumstances. Competitive bidding is a good thing to try in the exchanges, and it also a reasonable thing to try in Medicare. The key is that the amount of premium subsidy provided to patients must be set by the cost of an actual reference health insurance policy that is readily available in a given market.

Senator Wyden and Rep. Ryan’s plan proposed in December, 2011 may fall in the competitive bidding realm, because of how the amount provided by government to Medicare beneficiaries would not be set administratively, but would be set via a bidding process between private insurance companies (note: the details are important and the plan is not in legislative language as of this writing). Further, this proposal would maintain traditional Medicare, though it would have to live under the limits of the competitive bidding framework as well, with patients receiving cash payments if plans (or traditional Medicare) were able to provide health care to their covered population for less than the competitively determined bid amount, and being expected to pay more if the premium was higher. [note: the 2012 House budget included an option to remain in traditional Medicare, unlike the 2011 budget]

Without some shared language, there is no hope of a reasonable policy debate.

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.

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.

Could we even recognize a deal?

Robert Pear’s article last week claiming a general agreement for premium support across the political aisle caused ruffles.

• Avik Roy was a bit incredulous.
• Austin, who has written as much about premium support and competitive bidding as anyone, provided a reality check that the policy details are more important than the label.
• James Pethokoukis said the Democrats owed Rep. Paul Ryan an apology for savaging his Medicare reform proposal if they were coming around on premium support in Medicare, while Kevin Drum said no way it was his details that were bad, and progressive policy wonks invented the idea in any event thank you very much.
• Andrew Sullivan weighed in, making the critical distinction between deciding there will be premium support of some sort and not an unlimited amount, and determining how much that support will be (Austin’s FAQ makes this point over and over).
• Yuval Levin is all for premium support in Medicare, but not in the under-65 age group, and he thinks the Democrats have been very hypocritical in their opposition to Ryan’s reforms given that they have set up premium support in the ACA.
• I have written about the many similarities to the ACA of the main Republican reform bill in the last Congress, the Patients’ Choice Act (sponsored by Ryan and Nunes in the House, and Coburn and Burr in the Senate), but this of course didn’t temper criticism of the ACA.
• The Bipartisan Policy Center has done lots to promote the idea of premium support and competitive bidding through their Domenici-Rivlin Protect Medicare Act and that has provided some momentum.

There does seem to be some consensus that we want to set up better functioning markets for health insurance, and that we need to do so in a manner that could hopefully address health care cost inflation by harnessing competition. Both “sides” seem to mostly be focused on pointing fingers at the other for being hypocritical in selectively being for these principles (one group is for premium support and competition in the under 65 age group, but not in Medicare; and it is the exact opposite for the other group).

I think if a space traveler dropped in and saw all this for the first time, that they would assume we must be near a deal to move ahead with health reform. In policy terms I can see it, yet in political terms it seems impossible.