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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

A New Estimate of the Potential Impact of Competitive Bidding on Medicare Expenditures



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Back in 2010, the economists Robert Coulam, Roger Feldman, and Bryan Dowd estimated that Medicare competitive bidding had the potential to reduce Medicare expenditures by a substantial amount:

Two years ago, we estimated that a fully implemented competitive bidding system would have saved approximately 8 percent of Medicare costs in 2005.[4] We subsequently extrapolated this estimate to a savings of $550 billion over ten years. However, two significant changes have occurred in the Medicare program that alter the savings through competitive bidding. First, MA enrollment has grown from about 12 percent of all Medicare beneficiaries in 2005 to 25 percent in September 2011.[5] Second, Medicare changed its method of paying MA plans from one based on (but always higher than) FFS costs to a new system that will pay more than FFS in low-cost areas and less than FFS in high-cost areas.

In the Outlook from which the above passage was drawn, Coulam et al. estimate that competitive bidding would have reduced Medicare expenditures by an even higher amount in 2009:

Using data from 2009, we estimate that fully implemented competitive bidding would save 9.5 percent of Medicare spending, more than our previous estimate.

More recently, Zirui Song, David Cutler, and Michael Chernew offered their own estimate of the potential impact of competitive bidding by modeling how it would have impacted Medicare expenditures in 2009. And they find that competitive bidding would have reduced Medicare expenditures by at least 9 percent, a number that is strikingly similar to the findings of Coulam et al. There is a clear political downside, as Austin Frakt explains:

If every beneficiary had been enrolled in traditional Medicare in 2009, the estimated savings would have been exactly 9%. But almost one-quarter of beneficiaries were enrolled in a Medicare Advantage plan (pdf), which was paid 14% more than the cost of traditional Medicare at the time. So, under the Ryan-Wyden approach that brings payments to plans down to or below the cost of traditional Medicare, the savings would be higher than 9%.

Of course, holding all else equal, the full plan premiums must be paid by someone. The authors tell us what proportion of beneficiaries would have been stuck with a higher bill: 68% of traditional Medicare enrollees and 90% of MA enrollees. Don’t expect them to be happy.

On the other hand, it’s not likely all else would remain equal. Some beneficiaries would switch plans to avoid higher premiums. Perhaps plans would find ways to economize on costs, become more efficient. That’s the hope (claim) of competitive bidding/premium support advocates anyway.

Cutler, significantly, has worked closely with the Obama administration on its coverage expansion effort. His relatively sanguine take on the competitive bidding model at the heart of the Ryan-Wyden and Domenici-Rivlin could be an indication that Democratic-leaning policy intellectuals might reconcile themselves to competitive bidding, or in some cases re-reconcile themselves to it. 

P.S. As Yuval Levin points out, Song, Cutler, and Chernew have framed the results in an interesting way — they emphasize that because premium support will be linked to the second-lowest plan bid, and traditional Medicare will often be undercut by private options, that many beneficiaries will have to pay an additional amount to enroll in traditional Medicare. This, of course, means that there is “money on the table” if what we care about is preserving a defined benefit. But that’s not how Song et al. put it:

Premium support, based on competitive bidding, may offer a fiscal solution if ACA reforms fail, but at the cost of making Medicare beneficiaries responsible for solving Medicare’s fiscal crisis. Success of the ACA can make premium support less risky by lowering traditional Medicare costs and helping to monitor and improve quality in private plans. Without ACA improvements, beneficiaries must pay more for traditional Medicare or join a private plan. Given the current fiscal pressures, thismay be acceptable, but it is a major shift from traditional Medicare that may have deleterious consequences.

Medicare beneficiaries are guaranteed that they will pay no more than they do at present for today’s benefit. The only requirement is that they choose the provider the delivers the benefit most cost-effectively. 

So let’s translate this by making reference to Josh Barro on Amtrak’s hamburgers. As you’ll recall, Amtrak charges passengers $9.50 for hamburgers it costs the system $16 to sell. One can imagine a bidding process in which other hamburger providers will compete with Amtrak in different regions, and Amtrak will also be given greater flexibility to compete. Passengers will be charged the equivalent of the second-lowest hamburger bid in any given region rather than a flat $9.50. Let’s say a private hamburger provider manages to bring its bid down to $9.00, a full $7.00 below Amtrak’s hamburger public option and this is the second-lowest bid. Passengers in this region will be given a $9.00 hamburger voucher for the express purpose of purchasing on-board hamburgers. If a passenger still wants to purchase her hamburger directly from Amtrak, she will have to pay an additional $7.00 out of pocket. If she chooses to go with the lowest bidder, and the lowest bidder brings its bid down to $8.00, she will get $1 as a rebate. But here is the crucially important thing: the hamburgers are for all intents and purposes identical. 

Suffice it to say, people who insist on purchasing identical hamburgers that cost $16.00 rather than $9.00 or $8.00 will find themselves in a bind. Price signals will be used to encourage them to purchase the cheaper identical hamburgers, which seems reasonable. The funny thing is that the worse a job our Amtrak hamburger public option does of lowering costs, the bigger the bogeyman number defenders of the Amtrak hamburger public option can deploy. (Note also that if the Amtrak hamburger public option manages to dramatically improve its efficiency, it will undercut private providers.) 

The premise of Ryan-Wyden and Domenici-Rivlin is that using price signals to encourage Medicare beneficiaries to choose more efficient providers is a good thing. Song et al. are suggesting that traditional Medicare, like the traditional Amtrak hamburger public option, is uniquely important and valuable. 

I should stress that it is entirely possible that there really is something uniquely important and valuable about the traditional Amtrak hamburger public option. For example, we could value its role as a subsidized jobs program over its role as a cost-effective provider of microwavable hamburgers. 



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