A Competitive Bidding Approach to Medicare Reform

1. A Competitive Bidding Approach to Medicare Reform by Roger Feldman Bryan Dowd University of Minnesota  Robert Coulam Simmons College American Enterprise Institute Washington, DC  April 16, 2013

2. We would like to thank:The Robert Wood Johnson Foundation for financial support in writing this paper.AEI and Joseph Antos, PhD, for support and guidance throughout this effort.

3. Why competitive bidding? • Reform is critical, given Medicare’s fiscal crisis • The most promising options for reform are based on competitive bidding • The version we propose uses health plans’ bids to determine the government contribution to all Medicare plans • Competitive bidding would be relatively easy to implement in Medicare • Medicare prescription drug coverage already uses competitive bidding • It will save money, but we would recommend it even if Medicare were not in dire fiscal shape!

4. Four key assumptions • Medicare is a defined benefit program • The government should buy that benefit at the economical cost of producing it in each market area • The entitlement should be to the benefit, not to a particular plan that offers it –Traditional FFS and MA plans treated equally –The “overpayment” critique applies to both FFS and MA plans • Provision must be made for poor beneficiaries – Overpaying health plans is an inefficient way to help beneficiaries • Instead, give targeted help to the people who need it most

5. Organization of our talk • What is competitive bidding? • The effects of competitive bidding • The critical arguments about competitive bidding – political and other

6. I. What Is Competitive Bidding?

7. How does competitive bidding work? • Medicare qualifies bidders • Plans submit bids for a given area • Bids = cost of statutory benefits for an enrollee of ‘standard risk’ • FFS ‘bid’ = average FFS cost of care for standardized enrollee in each county (already computed for every county in the country) • Medicare pegs its contribution to some function of the bids – e.g. lowest or 2nd lowest bid • Payment for each enrollee based on risk adjustment of benchmark amount for standard enrollee • Beneficiaries choosing more expensive plans pay the difference out of their own pocket • Plans bidding less than the government contribution can refund the difference as extra benefits or premium rebates with no ‘tax’

8. Competitive bidding: the only realistic way to discover the cost of providing the Medicare benefit • In all administrative alternatives to competitive bidding, information about the costs of care flows in the wrong direction • From the organization that knows very little about MA costs (the federal government) to the organizations that know as much as is possible (the MA plans) • Competitive bidding reverses the flow of cost information • MA plans tell the government how much it costs to care for Medicare beneficiaries • Plans submit bids under a system that rewards low bids and penalizes high bids • This homily from Economics 100 remains the most compelling justification for competitive bidding • Even if Medicare were not in financial distress: why pay more than efficient quality plans – public or private – can offer?

9. Implementation issues • There are many technical issues involved in any payment system: • Bidding area • Qualifying plans to bid – especially new plans • Performance measures for FFS and MA • Risk adjustment • How much product variety is allowed within the standard benefit • Medicare already does most of what would be required to implement competitive bidding: • Defines a statutory benefit package • Qualifies plans • Defines bidding areas (counties for traditional Medicare; service areas for private plans) • Takes bids and risk-adjusts them • Medicare does not use the bids it already receives to establish the benchmark price

10. Terminology: Competitive bidding a better term than ‘premium support’ • ‘Premium support’ is too vague • Refers to widely varying bidding models with widely varying political and economic consequences • ‘Competitive bidding’ a better term, accomplishes two things: • Sets the level beyond which higher bidders have to charge a premium • Sets the government contribution based on the bids  government pays for at least some option(s) that provide the entitlement for no added premium

11. II. The Effects of Competitive Bidding

12. Savings from competitive bidding • We calculated the savings from a fully-implemented competitive bidding system • Feldman, Coulam, and Dowd, AEI Policy Brief No. 2, February, 2012 • Plans submit same bids as today – a conservative approach • Government contribution set at lower of 25th percentile of private plan bids or cost of traditional Medicare • The results: • 9.5 percent savings versus pre-ACA baseline • 5.6 percent more than the ACA • $339 billion savings through 2020 compared with the ACA

13. Distribution of Savings from Competitive Bidding($ = dollars per member per month)

14. Disruption to Enrollees in Traditional Medicare • Beneficiaries will have to pay out-of-pocket premiums for traditional Medicare in some areas • We don’t have natural experiments to predict what would happen in areas where FFS is the high bidder • Observational studies: most FFS enrollees would opt to pay higher premiums • This would lead to financial disruption, but not disruption in quality and continuity of care • Low-income beneficiaries are most likely to leave FFS, although many already have left • Some see higher premiums as a positive feature of bidding • Private plans realize they can gain enrollment by submitting low bids • The result: lower bids and greater savings

15. Disruption to Enrollees in Private Plans • The main source of disruption to private-plan enrollees is loss of ‘free’ benefits • Private plans offer these benefits because they are paid more than the cost of traditional Medicare (MedPAC, 2012) • ACA reduced this amount to 7% • Competitive bidding would complete this reduction • What looks bad from the enrollee’s point of view is good stewardship of Medicare’s budget

16. III. The Critical Arguments about Competitive Bidding

17. Competitive bidding is the best way to defend the entitlement benefit The alternatives for addressing Medicare’s fiscal crisis reduce to: • Arbitrary cuts in benefits, eligibility, payments, or other program terms – Beneficiaries and providers bear the cost • Payment reform (e.g., bundled payment, value-based purchasing) – Theoretically interesting, but largely untested • Premium support limits growth in the government contribution to a predetermined level (“spending cap”), regardless of program costs • Beneficiaries bear financial risk for cost growth beyond the spending cap • Competitive bidding ensures availability of the entitlement benefit at the cost of the Part B premium • Beneficiaries are not at risk for cost increases, but they must adapt if a preferred health plan increases in cost, relative to other plans • Competitive bidding does not limit the growth of Medicare costs to a predetermined percentage

18. Need for a mixed system of public and private plans University of Minnesota/ Simmons College • Both plans have advantages • Advantages of one tend to be disadvantages of other  value in keeping mixed system • Traditional plan has advantages such as: • Universal geographic availability • Possible economies of scale • Offsets to provider market power in some areas • Private plans have advantages such as: • Coordination of coverage and services • Flexibility in cost-sharing • Ability to experiment in care delivery and disease management • Incentives to pursue efficient purchasing strategies • Product diversity • Areas where evidence is mixed include quality of care and administrative costs • Challenge: creating a level playing field – politics and governance 18

19. Liberals should support competitive bidding • Competitive bidding is the best way to defend the entitlement benefit and thus the fundamental promise of the Medicare program • SOME change in Medicare is required for fiscal reasons • The alternatives are worse • This change preserves an entitlement benefit at no added premium • Preserves traditional FFS program, though under price competition • Allows decisions on key parameters to accommodate liberal political judgments – e.g., to buffer elders from abrupt changes • Eliminates overpayments to private plans (and the traditional plan) in a disciplined, defensible way • Not a stalking horse to ‘privatize Medicare’ – any more than the current MA program is • No evidence that quality of care would suffer in shifting from traditional Medicare to MA plan

20. Competitive bidding and Medicare: lessons in history and law • Since 1980: ~10 efforts to demonstrate/phase-in competitive bidding for some part of Medicare benefit, including MA plans • Almost all have failed • Not due to practical problems or failure to save money – political opposition has been the key obstacle to competitive bidding • Was proposed by Democratic and Republican administrations • But killed by Democrats and Republicans in Congress • Abetted by courts acting in response to lawsuits generated by health plans and providers • Difference today: Medicare’s dire financial situation may override political opposition

21. Effects of fiscal crises • Medicare’s fiscal crisis is the reason the difficult politics of competitive bidding have a chance • Facing serious fiscal problems, Congress has acted to impose politically difficult changes (not always permanent): e.g., PPS, Balanced Budget Act of 1997 • The current situation is much worse • ‘Muddling through’ with incremental changes is expedient politics, but very risky • Medicare Trustees have warned repeatedly that delaying action will constrain future options for addressing Medicare’s problems • Response to political difficulties of reform • Don’t minimize the extent of the reform • Recognize reasonable beneficiary needs and expectations in the transition to reform

22. Summary 22 University of Minnesota/ Simmons College • Different Congresses and Administrations have tilted the playing field in favor of one plan type or another • Predictable cycles in administrative payment formulae, from generosity to stringency • Time to design a payment system that: • Lets plans tell the government how much it costs to care for beneficiaries, not the other way around • Subjects plans to a predictable set of consequences if they submit low or high bids • Is consistent with other reforms being contemplated – this does not block the way to value-based purchasing, ACOs, etc. • Saves money in a defensible, non-arbitrary way: At least 5.6% compared with ACA

23. Contacts feldm002@umn.edu dowdx001@umn.edu coulam@simmons.edu