Potential consequences of reforming Medicare into a competitive bidding system.

Zirui Song, PhD David M. Cutler, PhD Michael E. Chernew, PhD THE IDEA OF A PREMIUM SUPPORT (OR VOUCHER) SYStem for Medicare has generated substantial debate. Under premium support, Medicare beneficiaries would choose from health plans that compete in a market-based bidding system. In some models, traditional Medicare is abandoned entirely in favor of private health plans. In other models such as the Ryan-Wyden plan, traditional Medicare becomes one option among many. Proponents of premium support cite 2 potential strengths. First, competition may lower health care spending. Second, by pegging the Medicare contribution to one of the lowercost plans and limiting the increase in the government’s contribution over time, public spending on Medicare will slow. Critics state that bidding essentially shifts costs to beneficiaries by increasing their required premiums. Competitive bidding is not new to Medicare. The Medicare Advantage (MA) program has used bidding to determine plan payments since 2006. In MA, plans submit a price (bid) they are willing to accept to insure a beneficiary. Payment is determined by comparing the bid with a benchmark payment rate setbyMedicare(publishedannuallyonline),basedonthecounties the plan serves. If the bid exceeds the benchmark, Medicare pays the plan the benchmark rate and the plan must collect the difference by charging a premium to enrollees. If the bidundercuts thebenchmark, theplan ispaid itsbidplus75% of the difference (a rebate), which it must return to enrollees viaextrabenefitsor lowerpremiums.Currently,morethan90% of MA plans offer some kind of rebate to attract enrollees. BasedontheRyan-Wydenplan,thebiddingsystemproposed in the recent House Republican budget replaces the administrativelysetbenchmarkwithamarket-determinedbenchmark. In every county, either the plan with the second-lowest bid or traditionalMedicare (whichever is lower)becomes thebenchmark.Thus, everybeneficiarywouldhaveatmost1 lower-cost option.Anybeneficiarychoosingaplan(including traditional Medicare) that bids above the benchmark must pay the differencebetween thatplan’sbidand thebenchmarkoutofpocket. AnestimateofwhatsuchabiddingsystemmaymeanforMedicare beneficiaries, using 2006-2009 data on MA plan bids and traditional Medicare costs, is shown in the TABLE. Nationally, in 2009, the benchmark plan under the Ryan-Wyden framework (ie, the second-lowest plan) bid an average of 9% below traditional Medicare costs (traditional Medicare was equivalent to approximately the tenth-lowest bid). Since traditional Medicare issimplyanotherplanoptionundertheRyan-Wyden plan, a beneficiary in 2009 would have paid an average of $64 per month (9% of $717) in additional premiums to stay in traditionalMedicare.Across theUnitedStates,68%of traditional Medicarebeneficiaries in2009(approximately24millionbeneficiaries)livedincountiesinwhichtraditionalMedicarespendingwasgreater thanthesecond–leastexpensiveplanandwould have paid more to keep their choice of coverage (a share that wouldhavebeen81%in2008,75%in2007,and67%in2006). Furthermore,morethan90%ofMAbeneficiaries(approximately 6.6 million seniors, excluding those dually eligible or in employerplans)wouldhavealsopaidmorefortheplantheychose. Private plans can cost less than traditional Medicare because: (1) they may use medical resources more efficiently; (2) they may enroll healthier patients relative to the riskadjusted payment; or (3) their negotiated prices may not fully reflect the costs of indirect medical education or payments for disadvantaged hospitals, which traditional Medicare explicitly pays. The magnitudes of efficiency, selection, and avoided add-on payments are unclear; debate over whether add-on payments should be included in the traditional Medicare amount for bidding purposes is ongoing. To the extent that the 9% cost advantage reflects efficiency, it suggests there are better ways toprovide the traditionalMedicarebenefit. Indeed, if plans are bidding above their cost of insuring beneficiaries, the 9% gap may underestimate the full efficiency gain. Affordable Care Act (ACA) reforms to traditional Medicare maychangetheseestimatesbymovingtraditionalMedicare towardimprovedincentivesforcostandqualitythroughaccountablecareorganizations,bundledpayments, andstrengthening primary care. The ACA also aims to slow the growth of traditionalMedicarecostsbyreducing fee increases for somehealth care institutions. If traditional Medicare costs slow but do not closethe9%gapentirely,ascurrentlyprojected,millionsofbeneficiarieswill still have topaymore, although less than$64per month, to maintain their choice of coverage—assuming the benchmark stays the same. However, if the ACA reduces traditionalMedicarecostsenoughsothat traditionalMedicarebecomes thebenchmark,beneficiarieswouldnolongerpaymore tokeep traditionalMedicare; instead,MAplanswouldbecostlier than traditional Medicare and require a premium. Theseestimatesmayhavepotential implications forpolicymakers. Specifically, if competitionor theACAdoesnot lower