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Senior Citizen Opinions & Analysis
Medicare Advantage Competitive Pricing: The
Political Failure of a Good Idea
‘There should be a better way to pay Advantage
plans, one less likely to be a taxpayer rip-off…’
Austin Frakt, Associate Professor of Health Policy and Management
Boston University’s School of Public Health
 April
13, 2010 - Few Americans should be satisfied with the way the government
pays private health insurance plans that participate in the Medicare
Advantage program. Taxpayers pay
14 percent more to insure a beneficiary through the Advantage
program than through traditional, fee-for-service Medicare, the
program’s “public option.” The new health reform law–the Affordable Care
Act--will reduce, but not eliminate, the additional payments to
Advantage plans. Medicare beneficiaries are
concerned about the reductions in Advantage plan availability and
generosity that will result from those payment cuts.
There should be a better way to pay Advantage
plans, one less likely to be a
taxpayer rip-off or to contribute to swings in plan availability and
generosity. In fact there is, and Medicare’s prescription drug program
uses it successfully: competitive pricing (also called competitive
bidding). Under a competitive pricing system plans bid their price to
provide a standard set of services. The amount the government pays a
plan reflects bids offered by all competing plans (e.g. payments are set
to the average bid).
The critical component missing from the Advantage
program is payments related to bids. Instead, payments are based on a
formula established by Congress. The differences between this
“administrative pricing” system and competitive pricing are related to
taxpayer and beneficiary dissatisfaction with the Advantage program.
The effort to bring price competition to the
Advantage program is a long story of
health plan opposition and political failure. Nevertheless, if it
were allowed to function, a competitive payment system has the potential
to take politics out of pricing and result in lower volatility in
payments, Advantage plan participation and benefits.
Congressional meddling has become almost synonymous
with Advantage administrative pricing. Payment rates are political tools
used as means of compromise or to extract concessions. They’re also a
source of revenue. Payments go up when it benefits certain members of
Congress. Payments go down when money is tight and other expenses take
priority. The system may benefit politicians, but it disadvantages the
rest of us (insurance companies excepted).
Under a competitive bidding structure, changes in
payments, plan participation and generosity of benefits would be related
to changes in cost. Though costs increase, with bid-based payments the
large and disruptive changes imposed by the congressional tinkering of
administrative prices would be things of the past. The economic
efficiency would benefit taxpayers, and the consistency would be a
welcome relief to beneficiaries.
Politicians have tinkered with Advantage payments
by increasing them for plans in historically underserved rural areas.
The disproportionate power of senators from rural regions helped promote
and maintain administrative pricing and the higher rates it can deliver
to the areas they represent.
Thus, it was a great surprise when the Senate’s
health reform bill included a provision for Advantage plan competitive
pricing. Those of us who study Medicare and are close observers of the
political process were stunned. Not only had 60 senators, including many
from states with large rural regions, agreed to real price competition
but they did so despite decades-long industry resistance to anything of
the sort. The Senate bill then passed the House and was signed by
President Obama. For a brief and glorious week a more sensible Advantage
program payment system was the law of the land.
Then the budget reconciliation amendment was passed
and signed, and with it administrative pricing returned. Why in the
final hours of negotiation over health reform had the Democrats axed
competitive pricing? Wasn’t the disproportionate representation of rural
senators the big hurdle, one that it had already overcome? Sadly, in
this case, the Senate’s judgment was not decisive.
There are three potential reasons why lawmakers
purged competitive pricing at the last minute. First, the key difficulty
in the final days and hours was not in satisfying rural senators but in
satisfying reluctant representatives. And the House had already passed
an update to the administrative pricing Advantage program payment scheme
as part of its health reform bill.
Second, perhaps a few House holdouts wanted
assurance that insurers and beneficiaries in their districts would be
taken care of. When the problem is one of convincing fence-sitting
politicians, one enters the conversations with money in hand, not a
vague promise of an efficient market.
Finally, complying with the Congressional Budget
Office’s criteria, in order to receive a favorable score, was paramount.
Price competition is complex for CBO to score and more difficult to
tweak to wring out the last few billion dollars to make the numbers.
Administrative pricing, on the other hand, is relatively easy to score
and to adjust to hit a budget target. Adjusting the administrative
pricing system may have been a key element of conversations between the
Democrats and CBO in the frantic final hours of negotiation.
Until the inside story of health reform politics is
written we may not know the truth about how Advantage program
competitive pricing passed the Senate or why it was overturned. But one
thing is clear: the politics of Medicare is a cruel sport in which the
failure of good ideas is common. The upshot of the rough-and-tumble,
however, is that taxpayers and beneficiaries receive the hardest blows.
Note: Austin Frakt is a health economist and an Associate
Professor of Health Policy and Management at Boston University’s School
of Public Health. He blogs at
The Incidental Economist.
View all previous Frakt columns »
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 This
information was reprinted from
kaiserhealthnews.org with permission from the Henry J.
Kaiser Family Foundation. You can view the entire Kaiser
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An obscure provision of the Senate health bill
attempts to at least crack that barrier