Missing From Medicare Advantage: True Competition

By Austin Frakt

May 2, 2016

If you were contracting for a kitchen remodeling, you’d probably solicit bids and select the lowest one that meets your quality standard. Many goods and services purchased by the government are bought in a similar way, including certain medical equipment like walkers and wheelchairs for Medicare patients.

But a big part of Medicare isn’t: private coverage through Medicare Advantage. And that accounts for about a quarter of Medicare’s budget and a third of its enrollees.

It’s odd, since such competitive bidding approaches are part of both Republican and Democratic efforts to expand health insurance. Competitive bidding is built into Medicare’s prescription drug program — passed by a Republican Congress and signed by President Bush in 2003. And it’s built into the insurance marketplaces established by the Affordable Care Act — passed by a Democratic Congress and signed by President Obama in 2010.

Both kinds of plans are subsidized with government payments set by a competitive bidding process. Individuals enrolled in plans that cost more than the government subsidy have to pay the difference, a source of downward, competitive pressure on costs and bids.

Now, the White House is proposing a plan for Medicare Advantage to inject more competition, which the administration says would save $77 billion over 10 years. But the plan seems doomed, if past efforts are any guide.

Medicare Advantage plans submit bids to the government that reflect their estimated costs for provision of Medicare’s standard benefit. The current approach to paying those plans tries to incentivize lower bids, but is not true competitive bidding. The government payments are established by comparing plans’ bids with a price set by the government, not with one another. It would be like paying your kitchen remodeler an amount you previously established (somehow) and turning a blind eye to the extent it exceeds the contractors’ bids. The result: The government pays a typical Medicare Advantage plan more than 5 percent above its bid.

A perverse consequence of a lack of competition is that plans can garner additional government payment by “upcoding,” or making their enrollees appear sicker than they really are. Medicare pays plans more for sicker patients because such patients cost more. But this assessment is based on patient medical records, which can be influenced by the plans in subtle ways.

For instance, plans may include doctors in their networks who tend to more aggressively code diagnoses. They may also provide electronic tools or training that make it easier to do so. Another tactic is to require annual exams or to provide home visits; both approaches catch medical problems that might not otherwise be diagnosed. (Some, though not all, of the additional diagnoses may be useful, catching serious conditions early.)

Government audits of 201 patient records from each of five health plans released last year found upcoding in 80 percent of cases. And an investigation by the Center for Public Integrity found that upcoding accounted for nearly $70 billion in additional payments to Medicare Advantage plans from 2008 through 2013.

 “It amounts to $640 per Medicare Advantage enrollee per year absent any correction by the government,” said Timothy Layton, a postdoctoral research fellow at the Harvard Medical School. He is the co-author of a recent study of Medicare Advantage upcoding, along with a health economist at the University of Texas, Michael Geruso. Though payment adjustments by Medicare reduce the impact to about $120 per person per year, upcoding still costs a total of $2 billion annually, according to the study.

Under the new White House proposal, the government would solicit bids from Medicare Advantage plans, then pay those plans no more than the average bid, plus 5 percent.

The administration’s proposed approach would resemble how the government pays Obamacare marketplace plans and Medicare drug plans. But there are important differences. The subsidy for a Medicare drug plan is based on plans’ average bids — not 5 percent above them, as is proposed for Medicare Advantage plans. The government subsidy for lower-income individuals and families for marketplace plans is tied to the price of a silver-rated plan with the second-lowest premium — not the average premium, as proposed for Medicare Advantage plans. Competitive bidding approaches based on the lowest (or second-lowest) bid save considerably more money than those based on average bids.

“The administration’s competitive bidding proposal would likely reduce the fiscal consequences of upcoding,” Mr. Layton said. Plans could still upcode to garner additional payment. But any attempt to retain that additional revenue as profit would be undercut by a lower bid from another plan.

The debate over competitive bidding for Medicare plans often turns on whether traditional Medicare should be included. This is essentially Medicare’s “public option,” the coverage provided directly by the government. Doing so would cause the premiums for traditional Medicare to rise in markets where private plans have lower costs, putting it out of reach for some beneficiaries.

Some policy experts argue that this is an expected outcome because private plans could devise benefits packages attractive to healthier and less costly enrollees, while traditional Medicare’s benefit package is constrained by laws and regulations to cover the broader population. Others argue that shielding traditional Medicare from price competition — as the administration’s proposal would — saves less money and perpetuates a less efficient form of coverage.

This explains why competitive bidding — despite its bipartisan pedigree — is so vexing to politicians. Those who seek to preserve traditional Medicare as an option want to protect it from competitive bidding. Those who think it deserves, as Newt Gingrich put it, to “wither on the vine” advocate subjecting it to direct competition, along with other Medicare Advantage plans. These are mutually exclusive and widely held preferences, fracturing any possible broad coalition for competitive bidding.

No one is too sanguine about chances for success of the current proposal because five similar efforts have failed in the recent past. All were halted by Congress amid objections from health care insurers, providers and Medicare beneficiaries.

“There is really no political constituency for competition,” Robert Reischauer, former Congressional Budget Office director, said when a mid-2000s effort failed. It is still true today.

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