Competitive bidding in Medicare Advantage: Effect of benchmark changes on plan bids

Bidding has been proposed to replace or complement the administered prices that Medicare pays to hospitals and health plans. In 2006, the Medicare Advantage program implemented a competitive bidding system to determine plan payments. In perfectly competitive models, plans bid their costs and thus bids are insensitive to the benchmark. Under many other models of competition, bids respond to changes in the benchmark. We conceptualize the bidding system and use an instrumental variable approach to study the effect of benchmark changes on bids. We use 2006–2010 plan payment data from the Centers for Medicare and Medicaid Services, published county benchmarks, actual realized fee-for-service costs, and Medicare Advantage enrollment. We find that a $1 increase in the benchmark leads to about a $0.53 increase in bids, suggesting that plans in the Medicare Advantage market have meaningful market power.     

How Successful Is Medicare Advantage?

Context

Medicare Part C, or Medicare Advantage (MA), now almost 30 years old, has generally been viewed as a policy disappointment. Enrollment has vacillated but has never come close to the penetration of managed care plans in the commercial insurance market or in Medicaid, and because of payment policy decisions and selection, the MA program is viewed as having added to cost rather than saving funds for the Medicare program. Recent changes in Medicare policy, including improved risk adjustment, however, may have changed this picture.

Methods

This article summarizes findings from our group''s work evaluating MA''s recent performance and investigating payment options for improving its performance even more. We studied the behavior of both beneficiaries and plans, as well as the effects of Medicare policy.

Findings

Beneficiaries make “mistakes” in their choice of MA plan options that can be explained by behavioral economics. Few beneficiaries make an active choice after they enroll in Medicare. The high prevalence of “zero-premium” plans signals inefficiency in plan design and in the market''s functioning. That is, Medicare premium policies interfere with economically efficient choices. The adverse selection problem, in which healthier, lower-cost beneficiaries tend to join MA, appears much diminished. The available measures, while limited, suggest that, on average, MA plans offer care of equal or higher quality and for less cost than traditional Medicare (TM). In counties, greater MA penetration appears to improve TM''s performance.

Conclusions

Medicare policies regarding lock-in provisions and risk adjustment that were adopted in the mid-2000s have mitigated the adverse selection problem previously plaguing MA. On average, MA plans appear to offer higher value than TM, and positive spillovers from MA into TM imply that reimbursement should not necessarily be neutral. Policy changes in Medicare that reform the way that beneficiaries are charged for MA plan membership are warranted to move more beneficiaries into MA.     

Do Medicare Advantage plans select enrollees in higher margin clinical categories?

The CMS-HCC risk adjustment system for Medicare Advantage (MA) plans calculates weights, which are effectively relative prices, for beneficiaries with different observable characteristics. To do so it uses the relative amounts spent per beneficiary with those characteristics in Traditional Medicare (TM). For multiple reasons one might expect relative amounts in MA to differ from TM, thereby making some beneficiaries more profitable to treat than others. Much of the difference comes from differences in how TM and MA treat different diseases or diagnoses. Using data on actual medical spending from two MA-HMO plans, we show that the weights calculated from MA costs do indeed differ from those calculated using TM spending. One of the two plans (Plan 1) is more typical of MA-HMO plans in that it contracts with independent community providers, while the other (Plan 2) is vertically integrated with care delivery. We calculate margins, or average revenue/average cost, for Medicare beneficiaries in the two plans who have one of 48 different combinations of medical conditions. The two plans’ margins for these 48 conditions are correlated (r = 0.39, p < 0.01). Both plans have margins that are more positive for persons with conditions that are managed by primary care physicians and where medical management can be effective. Conversely they have lower margins for persons with conditions that tend to be treated by specialists with greater market power than primary care physicians and for acute conditions where little medical management is possible. The two plan's margins among beneficiaries with different observable characteristics vary over a range of 160 and 98 percentage points, respectively, and thus would appear to offer substantial incentive for selection by HCC. Nonetheless, we find no evidence of overrepresentation of beneficiaries in high margin HCC's in either plan. Nor, using the margins from Plan 1, the more typical plan, do we find evidence of overrepresentation of high margin HCC's in Medicare more generally. These results do not permit a conclusion on overall social efficiency, but we note that selection according to margin could be socially efficient. In addition, our findings suggest there are omitted interaction terms in the risk adjustment model that Medicare currently uses.     

From politics to policy: a new payment approach in Medicare Advantage

While the Medicare Advantage program's future remains contentious politically, the Medicare Payment Advisory Commission's (MedPAC's) recommended policy of financial neutrality at the local level between private plans and traditional Medicare ignores local market dynamics in important ways. An analysis correlating plan bids against traditional Medicare's local spending levels likely would provide an alternative method of setting benchmarks, by producing a blend of local and national rates. A result would be that the rural and lower-cost urban "floor counties" would have benchmarks below currently inflated levels but above what financial neutrality at the local level--MedPAC's approach--would produce.     

Effects of payment reform in more versus less competitive markets

Policymakers are increasingly interested in reducing healthcare costs and inefficiencies through innovative payment strategies. These strategies may have heterogeneous impacts across geographic areas, potentially reducing or exacerbating geographic variation in healthcare spending. In this paper, we exploit a major payment reform for home health care to examine whether reductions in reimbursement lead to differential changes in treatment intensity and provider costs depending on the level of competition in a market. Using Medicare claims, we find that while providers in more competitive markets had higher average costs in the pre-reform period, these markets experienced larger proportional reductions in treatment intensity and costs after the reform relative to less competitive markets. This led to a convergence in spending across geographic areas. We find that much of the reduction in provider costs is driven by greater exit of “high-cost” providers in more competitive markets.     

Why do so few HMOs offer Medicare risk plans in rural areas?

Only 17 of the 38 health maintenance organizations (HMOs) that have Medicare risk contracts and offer coverage to commercial clients in rural counties include the rural counties in their Medicare plan service areas. Rural counties in which HMOs offer Medicare coverage have higher average adjusted average per capita costs (AAPCCs), larger populations, and more physicians per capita than rural counties excluded by risk plans. Interviewed plans cite low and erratic AAPCCs, scarcity of potential enrollees, lack of negotiating power with physicians, and adverse selection as drawbacks in rural areas. Proposed changes to the payment methodology would probably lead HMOs to increase their Medicare offerings in urban fringe areas, but not in isolated rural areas.     

Understanding variations in Medicare Consumer Assessment of Health Care Providers and Systems scores: California as an example

Objective. To understand reasons why California has lower Consumer Assessment of Healthcare Providers and Systems (CAHPS) scores than the rest of the country, including differing patterns of CAHPS scores between Medicare Advantage (MA) and fee‐for‐service, effects of additional demographic characteristics of beneficiaries, and variation across MA plans within California. Study Design/Data Collection. Using 2008 CAHPS survey data for fee‐for‐service Medicare beneficiaries and MA members, we compared mean case mix adjusted Medicare CAHPS scores for California and the remainder of the nation. Principal Findings. California fee‐for‐service Medicare had lower scores than non‐California fee‐for‐service on 11 of 14 CAHPS measures; California MA had lower scores only for physician services measures and higher scores for other measures. Adding race/ethnicity and urbanity to risk adjustment improved California standing for all measures in both MA and fee‐for‐service. Within the MA plans, one large plan accounted for the positive performance in California MA; other California plans performed below national averages. Conclusions. This study shows that the mix of fee‐for‐service and MA enrollees, demographic characteristics of populations, and plan‐specific factors can all play a role in observed regional variations. Anticipating value‐based payments, further study of successful MA plans could generate lessons for enhancing patient experience for the Medicare population.     

Post-Acute Care in Inpatient Rehabilitation Facilities Between Traditional Medicare and Medicare Advantage Plans Before and During the COVID-19 Pandemic

ObjectivesCompare post-acute care (PAC) utilization and outcomes in inpatient rehabilitation facilities (IRF) between beneficiaries covered by Traditional Medicare (TM) and Medicare Advantage (MA) plans during the COVID-19 pandemic relative to the previous year.DesignThis multiyear cross-sectional study used Inpatient Rehabilitation Facility–Patient Assessment Instrument (IRF-PAI) data to assess PAC delivery from January 2019 to December 2020.Setting and ParticipantsInpatient rehabilitation for stroke, hip fracture, joint replacement, and cardiac and pulmonary conditions among Medicare beneficiaries 65 years or older.MethodsPatient-level multivariate regression models with difference-in-differences approach were used to compare TM and MA plans in length of stay (LOS), payment per episode, functional improvements, and discharge locations.ResultsA total of 271,188 patients were analyzed [women (57.1%), mean (SD) age 77.8 (0.06) years], among whom 138,277 were admitted for stroke, 68,488 hip fracture, 19,020 joint replacement, and 35,334 cardiac and 10,069 pulmonary conditions. Before the pandemic, MA beneficiaries had longer LOS (+0.22 days; 95% CI: 0.15–0.29), lower payment per episode (−$361.05; 95% CI: −573.38 to −148.72), more discharges to home with a home health agency (HHA) (48.9% vs 46.6%), and less to a skilled nursing facility (SNF) (15.7% vs 20.2%) than TM beneficiaries. During the pandemic, both plan types had shorter LOS (−0.68 day; 95% CI: 0.54–0.84), higher payment (+$798; 95% CI: 558–1036), increased discharges to home with an HHA (52.8% vs 46.6%), and decreased discharges to an SNF (14.5% vs 20.2%) than before. Differences between TM and MA beneficiaries in these outcomes became smaller and less significant. All results were adjusted for beneficiary and facility characteristics.Conclusions and ImplicationsAlthough the COVID-19 pandemic affected PAC delivery in IRF in the same directions for both TM and MA plans, the timing, time duration, and magnitude of the impacts were different across measures and admission conditions. Differences between the 2 plan types shrank and performance across all dimensions became more comparable over time.     

The effect of cancer diagnosis on switching health insurance in medicare

Because health insurance is intended to protect patients in the event of a health shock, it is important to evaluate health insurance policy in the context of patients who experience health shocks. I measure the effect of cancer diagnosis on health insurance switching in order to compare cancer patient's preferences among private and publicly administered Medicare. I estimate that a cancer diagnosis increases the probability a patient will leave a private Medicare plan, for the public plan, by 0.8% points (41%). Similarly, a cancer diagnosis decreases the probability a patient will leave the public Medicare plan, for a private plan, by 0.5% points (16%). The implication is that private Medicare plans are relatively less attractive to cancer patients than they are to noncancer patients.     

Issues regarding health plan payments under Medicare and recommendations for reform.

The failures of the market for current Medicare health plans include poor information and price distortions and can be attributed to government policy. Reforms that could improve its structure are annual open enrollment periods, premium rebates from health management organizations (HMOs) to members, and termination of the federal government's subsidy of Medicare supplementary insurance. However, the price for a basic Medicare benefits package would still be distorted because Medicare bases its contribution on the cost of a comparable package in the fee-for-service (FFS) sector rather than on the cost of the most efficient plan available to beneficiaries in each market area. The present Medicare HMO program almost certainly increases total Medicare costs and actually discourages HMO growth by shielding beneficiaries from the true price difference between basic benefits in the HMO and FFS sectors. Lacking payment reforms, the Medicare HMO program should be terminated.     

Geographic variation in determinants of Medicare managed care enrollment

OBJECTIVE: To examine the effect of adjusted average per capita cost (AAPCC) rate and volatility on Medicare risk plan enrollment at the county level. DATA SOURCES: Secondary data from the Health Care Financing Administration's office of managed care and other sources were merged to create comprehensive data on all Medicare risk plans in 3,069 of the 3,112 U. S. counties in December 1996. STUDY DESIGN: A two-step least squares regression was estimated to examine the effects of AAPCC rate and volatility, commercial HMO enrollment, market factors, and characteristics of the county population on Medicare HMO enrollment. The model was also used to simulate the effects of the Balanced Budget Act of 1997. Data from the Health Care Financing Administration were merged with other sources at the county level. The Federal Information Processing Standards code and a crosswalk file matching that code with the county name linked the data across sources. PRINCIPLE FINDINGS: The AAPCC rate has a small positive effect on the probability of Medicare HMO availability and enrollment. However, commercial HMO enrollment has a much stronger positive effect on Medicare HMO enrollment. Volatility has a negative effect on the probability of any Medicare HMO enrollment. CONCLUSIONS: The results suggest that payment changes enacted as part of the Balanced Budget Act will have a limited effect on Medicare HMO enrollment, especially in rural areas. Other policy changes are needed to stimulate Medicare HMO enrollment.