An Alternative to Command and Control in Medicare

.. is proposed in this AEI backgrounder by three healthcare economists. They argue for extending competitive pricing to all Medicare plans, including the traditional fee-for-service plan operated by the federal government itself.

... is proposed in this AEI backgrounder by three healthcare economists. They begin by observing:

Medicare should be an entitlement to a set of benefits, not to a particular way of financing or delivering those benefits.

Robert Coulam, Roger Feldman, and Bryan Dowd propose extending competitive pricing to all Medicare plans, including the traditional fee-for-service plan operated by the federal government itself. Today, the fees for each Medicare service are set by Congress, subject to complex formulas and even more complex lobbying. The privately operated Medicare Advantage plans then base their prices on the government's payments. The problems inherent in such a system are glaring:

under the current system, information about the costs of care flows in the wrong direction—from an organization that knows very little about the costs of providing insurance (the federal government) to the organizations that know as much as possible about these costs (private MA plans). This virtually guarantees misallocation of resources.

And the Obama plan - with its proposals for even tighter centralization of Medicare decisionmaking in the executive branch rather than Congress will only make the problem worse! Instead, the three economists propose to require all Medicare plans, including the government operated fee-for-service plans, make bids to the government to cover patient care.

Our preferred form of competitive pricing would set the government’s premium contribution at the lowest bid, subject to the lowest bidder having enough capacity to handle expected enrollment. Beneficiaries who wanted to join a more expensive health plan—including the FFS Medicare plan—would have to pay the additional cost out of their own pockets. The government’s premium contribution could be set at the median or average bid, but such an approach would reduce competitive pressures and reduce the savings from competitive pricing. The reward for low bidders would be increased enrollment. The penalty for high bidders would be lower enrollment as a result of having to charge an additional premium, making them less attractive to beneficiaries than less expensive plans that meet the same quality standards. The Obama administration has proposed a bidding process that recognizes the advantages of competitive pricing, but the administration’s proposal has a fundamental flaw: it excludes the [government-operated] FFS Medicare plan from the bidding process. The proposal is similar to an MA-only competitive bidding design that the Centers for Medicare and Medicaid Services unsuccessfully attempted to demonstrate in the 1990s.

If competition is good for privately operated plans, it should be good for the publicly operated plan too. The Obama administration's eagerness to apply price discipline to private insurers - while refusing price discipline for the government operated plan - reveals something very disturbing about the administration's policy intentions.

It is time to design a payment system that lets plans tell the government how much it costs to provide the entitlement benefit package to their enrollees—not the other way around—and that subjects the plans to a predictable set of consequences if they submit low or high bids.