The Recent History of Medicare Competitive Bidding

by Reihan Salam

In 2011, Paul Ryan, the Republican chairman of the House Budget Committee, and Ron Wyden, the Democratic senator from Oregon, backed an ambitious Medicare reform proposal, which bore a close resemblance to a proposal first introduced by the health economists Robert F. Coulam, Roger Feldman, and Bryan E. Dowd. The basic idea is that Medicare would be defined as an entitlement to a given set of benefits. The cost of providing this benefit package varies across different regions for a number of reasons, including differences in labor costs and the market power of local medical providers. To make the Medicare program as a whole more cost-effective, all Medicare plans would offer bids to offer this benefit package in different regions across the country, including the traditional fee-for-service Medicare plan, FFS Medicare. That is, FFS Medicare and private Medicare Advantage plans would go head-to-head; the federal government would benchmark its payment (“premium support”) for the Medicare benefit package to, say, the second-lowest bid. If FFS Medicare offers the second-lowest bid, Medicare beneficiaries could enroll in FFS Medicare for “free,” and they’d receive a rebate if they chose a Medicare Advantage plan that offers an even lower bid; if FFS Medicare offers the fifth-lowest bid, Medicare beneficiaries will have to pay extra to choose it over cheaper Medicare Advantage plans, and so on. The proposal from Ryan and Wyden has taken a winding road since 2011, thanks in part to the intervening presidential election. Wyden distanced himself from the proposal after taking heat from fellow Democrats for aligning himself with a conservative lawmaker who’d become a lightning rod for attacks from the political left. Moreover, Ryan has changed the benchmark for premium support to address the concern that tying premium support to the second-lowest bid was not sufficiently generous. In Ryan’s FY 2015 budget, premium support is based on the average bid rather than the second-lowest bid.

At The Upshot, Austin Frakt highlights the potential benefits of competitive bidding, which he (correctly) compares to how premium support works on the Affordable Care Act’s exchanges.

Today, plans receive a government subsidy according to an administratively set formula that does a poor job of matching payments to actual costs.

An alternative based on the Affordable Care Act’s structure could work something like this: Plans would submit bids for covering the Medicare benefit, as they do today. Then, instead of basically paying them what they bid in addition to some extra (which is more or less what happens today), the government would pick one of the cheaper bids (for example, the second lowest) and just pay that to all plans.

This is similar to how the Affordable Care Act, which bases subsidies on the cost of the second-cheapest silver plan, and the Medicare Part D prescription-drug plans work. Someone who wants a plan that costs more than the government payment must pay more out of pocket. Extra subsidies would be provided for low-income consumers, same as in the Affordable Care Act and Part D.

With such a structure in place, plans would compete more vigorously. Being the second-cheapest or cheapest plan would be a huge advantage. Other plans would have to charge a premium. Plans would not offer extra stuff beneficiaries might not value highly.

Curiously, Frakt makes no reference to the debate over the Ryan proposal, which just a few short years ago was extremely controversial. Furthermore, he endorses a form of competitive bidding that is in at least one important respect more fiscally stringent than Ryan’s proposal, i.e., Frakt suggests a benchmark tied to the second-lowest bid. One of the reasons Ryan moved to the average bid is that there was a concern that many Medicare beneficiaries wouldn’t be able to access FFS Medicare without paying more out of pocket. Shifting to the average bid wouldn’t eliminate this possibility, but it would make it less likely. So kudos to Frakt for at least appearing to outflank Paul Ryan on the right. 

The Agenda

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