Health economist Austin Frakt, who blogs at The Incidental Economist, has written a terrific column for Kaiser Health News on the potential for a competitive pricing system in Medicare:
According to analysis by American Enterprise Institute-funded health economists and researchers taxpayers could save 8% or about $50 billion per year (based on a 2010 Medicare cost estimate) through a competitive pricing system in which all plans, fee-for-service included, offer bids for a standardized set of benefits and the government pays all plans based on the lowest of these cost estimates. These potential savings come from the fact that Advantage plans can achieve lower costs in some markets, while fee-for-service can in others. As a result, with payments pegged to whatever plan type has the lowest cost in each local market, taxpayer dollars are used in the most efficient manner.
Under the bidding model preferred by these AEI analysts the lowest bid in a market – whether from a private plan or from fee-for-service Medicare – would be used to establish the government’s base payment to plans. This amount would then be risk-adjusted according to beneficiary health status. Beneficiaries opting for plans with higher costs or additional benefits would pay the additional cost. Means testing or a low-income subsidy program, as exists in today’s Medicare, could be incorporated to protect poorer beneficiaries from high residual out-of-pocket costs.
As Austin goes on to note, competitive bidding is not a panacea:
It also cannot, by itself, change the growth rate of health care costs. For that, further reforms to how fee-for-service and Advantage plans pay for care would be required, as well as changes system-wide, well beyond Medicare.
I strongly agree that we should make every effort to achieve savings greater than $50 billion per year. This is why I remain very interested in Dr. Harold Luft’s idea for a publicly-chartered Major Risk Pool (MRP):
A publicly chartered MRP can receive some initial public start-up funding, be not-for-profit in the long run, and operate transparently with a publicly appointed board. It can use Medicare leverage with those providers wishing to stay with classic FFS. The bundled payments it makes directly to new care delivery teams give them incentives to improve efficiency and quality. The chronic illness management payments channeled through insurers reduce their risk while allowing them to develop creative new payment arrangements with ambulatory care providers. Both types of innovations would likely be stymied by politics if attempted though a public plan. [Emphasis added.]
A publicly chartered plan can work well with private plans. A carefully crafted policy incorporating both can be more effective than either approach alone.
I’m disappointed that Luft’s approach hasn’t attracted more attention. It strikes me as a perfect complement to serious Medicare reform, one that has the potential to drive significant system-wide gains in efficiency.