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Health Care Financing: Is Traditional Medicare Uncompetitive?

One big reason I wanted to see a public option in the Affordable Care Act was that it seemed to me quite possible that private for-profit insurers would be unable to compete with it--that its administrative efficiencies would make it the sweet spot.

Austin Frakt thinks that this might be true as well:

Why traditional Medicare might thrive in a more competitive program: Under competitive bidding among Medicare plans, private health insurers and traditional Medicare would offer bids (their cost) for providing a defined benefit to an average risk beneficiary. The government would then set subsidies (premium support) at some level that is a function of the bids (like the minimum, second lowest, or average). To enroll in a plan that cost more, a beneficiary would pay more out of pocket…. [M]any people consider such an arrangement (e.g., the Domenici-Rivlin proposal)… a way to drive traditional Medicare out of the market, or at least some markets…. an adverse selection death spiral for the public option…. [T]raditional Medicare will become a high risk pool because private plans will outbid the public option and/or find clever ways to select good risks. However, it is not a foregone conclusion things would play out that way….

Among the moving parts are the prices Medicare will pay providers. According to analysis by the  CMS Office of the Actuary, under current law they’re going to go down — way down — relative to the prices to be paid by private health insurers…. It is possible for traditional Medicare to offer the lowest prices and still have relatively high premiums. It depends on volume. Volume is also something Medicare will be attempting to control. That’s what ACOs and bundled payments are, in part, all about….

If traditional Medicare prices drop so far below those of private insurers and with additional controls on volume and other advantages, how is it not going to be among the lowest bidders? How is it not going to remain a very attractive option? This is precisely the argument advocates of a public option in the ACA exchanges make.

One way it might lose attractiveness is that providers stop voluntarily participating in traditional Medicare’s (implicit) “network.” Maybe that causes access problems in some areas…. Plans with greater market share can reduce prices more easily with fewer providers walking away from the table. That is a consequence of market power, something traditional Medicare has to a greater extent than any other plan….

With network adequacy in place and prices dropping below private plans to an increasing extent, traditional Medicare may perform well under competitive bidding. Why are so many seeming to lack confidence that the program can compete?… Private plans… receive per beneficiary subsidies way above the average cost of traditional Medicare. They offer many additional benefits and many plans offer lower premiums and cost sharing relative to traditional Medicare. Still, traditional Medicare retains 75% of the market…. Thus, I think there is a chance traditional Medicare would do just fine under competitive bidding. It might even thrive…