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.     

Paying Medicare Advantage plans: To level or tilt the playing field

Medicare beneficiaries are eligible for health insurance through the public option of traditional Medicare (TM) or may join a private Medicare Advantage (MA) plan. Both are highly subsidized but in different ways. Medicare pays for most of costs directly in TM, and subsidizes MA plans based on a “benchmark” for each beneficiary choosing a private plan. The level of this benchmark is arguably the most important policy decision Medicare makes about the MA program. Many analysts recommend equalizing Medicare’s subsidy across the options – referred to in policy circles as a “level playing field.” This paper studies the normative question of how to set the level of the benchmark, applying the versatile model developed by Einav and Finkelstein (EF) to Medicare. The EF framework implies unequal subsidies to counteract risk selection across plan types. We also study other reasons to tilt the field: the relative efficiency of MA vs. TM, market power of MA plans, and institutional features of the way Medicare determines subsidies and premiums. After review of the empirical and policy literature, we conclude that in areas where the MA market is competitive, the benchmark should be set below average costs in TM, but in areas characterized by imperfect competition in MA, it should be raised in order to offset output (enrollment) restrictions by plans with market power. We also recommend specific modifications of Medicare rules to make demand for MA more price elastic.     

An economic history of Medicare part C

Context: Twenty‐five years ago, private insurance plans were introduced into the Medicare program with the stated dual aims of (1) giving beneficiaries a choice of health insurance plans beyond the fee‐for‐service Medicare program and (2) transferring to the Medicare program the efficiencies and cost savings achieved by managed care in the private sector. Methods: In this article we review the economic history of Medicare Part C, known today as Medicare Advantage, focusing on the impact of major changes in the program's structure and of plan payment methods on trends in the availability of private plans, plan enrollment, and Medicare spending. Additionally, we compare the experience of Medicare Advantage and of employer‐sponsored health insurance with managed care over the same time period. Findings: Beneficiaries’ access to private plans has been inconsistent over the program's history, with higher plan payments resulting in greater choice and enrollment and vice versa. But Medicare Advantage generally has cost more than the traditional Medicare program, an overpayment that has increased in recent years. Conclusions: Major changes in Medicare Advantage's payment rules are needed in order to simultaneously encourage the participation of private plans, the provision of high‐quality care, and to save Medicare money.     

Designing health insurance information for the Medicare beneficiary: a policy synthesis.

Can Medicare beneficiaries make rational and informed decisions about their coverage under the Medicare program? Recent policy developments in the Medicare program have been based on the theory of competition in medical care. One of the key assumptions of the competitive model is the free flow of adequate information, enabling the consumer to make an informed choice from among the various sellers of a particular product. Options for Medicare beneficiaries in supplementing their basic Medicare coverage include the purchase of private supplementary insurance policies or enrollment in a Medicare HMO. These consumers, in a complex health insurance market, have only limited information available to them because many health plans do not make adequate comparable product information available. Moreover, since the introduction of the Medicare HMO option, the long-range plan for management of the Medicare budget has become based on the large-scale voluntary enrollment of beneficiaries into capitated health plans. The policy instrument that has been used to improve beneficiary decisions on how to supplement Medicare coverage is the informational or educational program. This synthesis presents findings regarding the relative effectiveness of different types of health insurance information programs for the Medicare beneficiary in an effort to promote practical use of the most effective types of information.     

Open enrollment periods and plan choices

Open enrollment periods are pervasively used in insurance markets to limit adverse selection risks resulting when enrollees can switch plans at will. We exploit a change in the open enrollment rules of Medicare Advantage to analyze how beneficiaries responded to the option of switching to a 5‐star‐rated plan at anytime, in a setting where insurers adjusted premiums and benefit design to counterbalance the increased selection risk. We present three findings: Within‐year switches to 5‐star plans increase by 7–16%; demand for 5‐star plans across the years does not decline; and the enrollees who switch to a 5‐star plan during the year are in better health status than those who do not switch.     

Estimating Medicare advantage lock-in provisions impact on vulnerable Medicare beneficiaries

Beginning January 2006, Medicare beneficiaries will have limited ability to change health plans. We examine the Medicare managed care enrollment and disenrollment behavior of traditionally vulnerable beneficiaries from 1999-2001 to estimate the potential impact of the new enrollment restrictions. Findings that several such groups were more likely to make multiple health plan elections, leave their managed care plan midyear, and/or have higher voluntary disenrollment rates and transfers to original fee-for-service (FFS) Medicare suggest that the lock-in provisions may have greater negative impacts on vulnerable beneficiaries. This article identifies several recommendations that CMS might consider to lessen the detrimental effects on at-risk groups.     

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.     

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.     

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.     

The Effect of Health Plan Characteristics on Medicare+Choice Enrollment

Objective. To provide national estimates of the effect of out-of-pocket premiums and benefits on Medicare beneficiaries' choice among managed care health plans.
Data Sources/Study Setting. The data represent the population of all Medicare+Choice (M+C) plans offered to Medicare beneficiaries in the United States in 1999.
Study Design. The dependent variable is the log of the ratio of the market share of the j th health plan to the lowest cost plan in the beneficiary's county of residence. The explanatory variables are measures of premiums and benefits in the j th health plan relative to the premiums and benefits in the lowest cost plan.
Data Collection Methods. The data are from the 1999 Medicare Compare database, and M+C enrollment data from the Centers for Medicare and Medicaid Services (CMS).
Principal Findings. A $10 increase in an M+C plan's out-of-pocket premium, relative to its competitors, is associated with a decrease of four percentage points in the j th plan's market share (i.e., from 25 to 21 percent), holding the premiums of competing plans constant.
Conclusions. Although our price elasticity estimates are low, the market share losses associated with small changes in a health plan's premium, relative to its competitors, may be sufficient to discipline premiums in a competitive market. Bidding behavior by plans in the Medicare Competitive Pricing Demonstration supports this conclusion.