Medicare Advantage Proposal Reforms Benefits and the Bidding Process

The Medicare Trustees recently delivered a reminder of the importance of reducing Medicare costs. As Steven M. Lieberman, Loren Adler, Erin Trish, Joseph Antos, John Bertko, and Paul B. Ginsburg of the USC-Brookings Schaeffer Initiative for Health Policy show, one way is to improve Medicare Advantage, the private insurance option in Medicare. Their report proposes changes to Medicare Advantage plan benefits and the bidding process that they estimate could save around $10 billion annually.

Medicare Advantage uses a bidding process to determine payments to private insurers. Insurers bid to provide benefits equivalent to traditional Medicare. These bids are compared to benchmarks, which are generally limited to 95-115 percent of traditional Medicare costs based on which quartile of traditional Medicare spending a county falls into (higher-spending counties get lower benchmarks and vice versa). The federal government rebates the 50-70 percent of the difference between the bid and benchmark, depending on the plan's quality rating, and plans are supposed to use that rebate to lower premiums, reduce cost-sharing, or offer additional benefits.

The authors identify three issues with the current system that they seek to fix with their proposal:

1. Inefficiently high plan bids due to a poor bidding structure. Plans don't have a strong enough incentive to submit bids that are as low as possible because they don't get rebated the full difference between the bid and benchmark.
2. Poor consumer decisions due to a complex choice environment. The variety of plans can lead to consumers making poor decisions about which plan is best for them and can blunt competition.
3. Uneven subsidization of Medicare Advantage enrollees. The difference between benchmarks and bids varies widely by location, which leads some enrollees to have more generous plans than others.

The proposal would introduce a simpler competitive bidding system. Insurers would be required to offer a Standard benefit package whose actuarial value (AV) -- the percent of total health expenses the insurer pays rather than the enrollee -- is 5 percent higher than traditional Medicare. Insurers would submit bids for the cost of providing the Standard benefit and would be rebated all of the savings between the bid and 105 percent of traditional Medicare costs.

If the bids are lower than current law benchmarks, which the authors expect would be the case for the vast majority of enrollees, Medicare would pay benefits using this system; otherwise, it would stick to current law. In addition to the Standard benefit, insurers could offer a Standard Plus benefit with an AV 8 percent higher than traditional Medicare or an Enhanced plan that has the same AV as Standard Plus but with more benefit design flexibility.

The authors expect that the new system would lower costs by providing a greater incentive for plans to lower their bids and giving enrollees a more straightforward set of plans to compare. They estimate that the proposal would have saved the federal government $10 billion in 2015 and, consequently, reduced Part B premiums for Medicare Advantage and traditional Medicare enrollees by $1.4 billion.

The policy is similar to what President Obama proposed his FY 2017 budget, though he would not have changed benefit design. The Congressional Budget Office (CBO) estimated that policy would save $26 billion over ten years.

The authors' proposal should improve the functioning of Medicare Advantage for both beneficiaries and taxpayers. It is certainly an idea worth considering that would help control Medicare spending.

This blog is part of the American Health Care Initiative, a joint collaboration of the Committee for a Responsible Federal Budget and the Concerned Actuaries Group dedicated to informing the public, policymakers, and key stakeholders regarding the fiscal and managerial challenges confronting our health care system. As part of the initiative, the two organizations will each publish and promote a series of papers, briefings, presentations, and other materials intended to energize a much-needed conversation about improving the sustainability and accessibility of our health care system and managing the rising costs that threaten our current system.