The Agenda

Brief Thought on Medicare for Over-55s

I have an idea that must be unsound, as I haven’t heard any sensible person tout it as yet. 

Recently, I took a stab at explaining the logic of competitive bidding. Basically, the goal is to preserve a defined benefit, but to encourage providers to deliver the defined benefit at the lowest feasible cost by pegging premium support to the second-lowest bid. Medicare beneficiaries who choose provider that has to spend more than the second-lowest bidder to deliver the same defined benefit will have to pay the difference out of pocket, thus encouraging beneficiaries to choose the most efficient providers in a given region. 

This is not how the Medicare system works at present. Though Medicare Advantage plans do make bids that reflect the cost of providing the standard Medicare benefit, they are compensated on the basis of a complicated benchmark. 

In a recent discussion of the Medicare savings in PPACA, Kate Pickert of Time offers a vigorous defense of the Obama administration’s approach:

As for the cuts, they come from eliminating a massive subsidy to private insurers and gradually reducing the rate of growth in payments to some providers. These changes, while not catastrophic for Medicare, are important. Under the ACA, the federal government will substantially reduce the amount it spends funding Medicare Advantage, which is privately administered insurance offered to Medicare beneficiaries. About one-quarter of Medicare recipients are enrolled in private Medicare Advantage. In theory, these plans are supposed to manage health care spending better than fee-for-service Medicare. But they don’t actually save the federal government any money. They cost, per patient, 14% more than traditional Medicare. (See Figure 3 of this fact sheet from the Kaiser Family Foundation. And see here for more.) The ACA eliminates this subsidy and pegs Medicare Advantage payments to quality metrics.

As we know, however, the fact that these Medicare Advantage plans don’t actually save the federal government any money is an artifact of the benchmark, for reasons the Kaiser Family Foundation references in the fact sheet Pickert references:

Medicare Advantage plans are paid to provide all of Medicare’s basic benefits, and are required to use any rebates they might receive by bidding below the benchmark to offer extra benefits such as vision or hearing, or reduced cost sharing or premiums. An analysis by MedPAC indicates reduced cost-sharing is the most common benefit enhancement but that for 2009 Medicare pays $1.30 in subsidies to the plans for each $1 provided in extra benefits. Companies that offer Medicare Advantage plans (excluding PFFS, MSA, and cost plans) are required to offer at least one plan that covers the Part D drug benefit. In 2009, 84% of beneficiaries enrolled in Medicare Advantage are in a plan that covers the Part D drug benefit. [Emphasis added]

Instead of the rebates going to Medicare beneficiaries directly in the form of cash, they are directed to reducing cost-shoring. Reduced cost-sharing tends to increase utilization, so it is easy to see why this approach has proven problematic. Under competitive bidding, in contrast, low-cost providers will have a much bigger advantage in attracting beneficiaries and this will promote greater efficiency across the health system.

And pace Pickert, we have new research which finds that had competitive bidding been in place in 2009, it would have reduced Medicare expenditures by at least 9% while preserving access to the Medicare defined benefit for all beneficiaries. 

Pickert goes on to explain that the remaining cuts from PPACA come in the form of reduced payments to hospitals, home health agencies, and other medical providers. So she writes:

Medicare benefits will not change – in theory. However, providers who get paid less from Medicare in the future may be less inclined to accept Medicare patients, thereby reducing access.

She nevertheless concludes by making a heroic assumption:

The idea, however, that the Affordable Care Act struck a dangerous blow to Medicare that will change the program in fundamental ways is untrue. Under the new law, Medicare will remain a wildly popular, public single-payer health insurance system that provides comprehensive coverage to millions of Americans.

Though Pickert’s confidence is admirable, our experience with administrative price-setting is not entirely encouraging.

That said, Picket is right to evoke the rising cost of Medicare as a serious concern. This is one reason why critics like Josh Barro have condemned the Romney-Ryan call for eliminated the Medicare savings put in place by PPACA.

If the goal of Romney-Ryan is to protect Medicare in essentially its current form and to reverse PPACA administrative cuts for over-55s, one wonders if the best strategy might be a modified version of competitive bidding. 

Rather than peg the level of premium support to the second-lowest bid in any given region, perhaps we could peg it to the cost of having Medicare FFS deliver the defined benefit. Medicare Advantage plans that underbid Medicare FFS would be required to provide Medicare beneficiaries an unrestricted cash rebate reflecting most of the difference. In regions where Medicare FFS is highly efficient, this won’t have much of an impact. In regions where it is not, we will presumably see a dramatic shift to more efficient providers. Yet unlike the Wyden-Ryan approach, in which the second-lowest bid forms the basis for the premium support level, and only choosing the one lower-cost provider will yield a cash rebate, Medicare beneficiaries will in many cases have many options to choose from that will provide a cash rebate. 

As over-55s cycle through the system, there would be a gradual transition to pegging premium support to the second-lowest bidder. Cash rebates will tend to dwindle over time, which might engender resentment. Regardless, this might be a way to yield savings without forcing older beneficiaries to radically revise their expectations, which is the ostensible goal of the Romney-Ryan go-slow approach. 

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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