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

TL;DR: 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.

Abstract: 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.

Summary

1. Introduction

• A Medicare beneficiary decides between health insurance from the public option of traditional Medicare (TM), or from a private plan offered through the Medicare Advantage (MA) program.
• This paper addresses arguably the single most important decision Medicare makes about the MA program, setting the benchmark subsidy.
• The authors main analytical finding in this section, summarized by what the authors refer to as Observation 1, states that with favorable selection into MA and increasing incremental marginal cost in MA, a level-playing field policy is not efficient and leads to too many beneficiaries in MA.
• Section 5 draws the implications of their analyses.
• The authors present some of the findings from that paper in their literature review below.

2.1 Medicare Advantage

• Since 1985, beneficiaries have had the option to choose health insurance through a private plan in Medicare Part C, currently known as Medicare Advantage (MA).
• If the bid is below the benchmark, the plan must pass the rebate through to beneficiaries in the form of lower premium or increased benefits.
• Geruso and Layton (2015) find that MA plans code 6-16% higher for the same person as TM, and elevated coding is greatest in the vertically integrated MA plans like HMOs where a plan is in a better position to transmit incentives to providers.
• By comparing costs conditional on risk score, Curto et al.’s estimate that MA plan enrollees are about 7 percent less costly than TM conditional on risk score captures both differences due to coding practices and differences due to selection.
• A review of the literature on selection, cost and market power indicates that there is substantial heterogeneity in the nature of MA plans and the market settings in which they find themselves.

3. Sorting Between MA and TM: Application of the Einav-Finkelstein Model

• The EF model was created to analyze demand-driven risk selection between two plan options with fixed characteristics.
• The relation of marginal cost curves for MA and TM in Figure 1 reflect any quantity and input price differences between the two sectors.
• 2 Efficient Enrollment and MA Premium Otherwise, the beneficiary belongs in TM.
• As is recognized in the literature on health plan choice, no single premium can sort consumers efficiently, given their heterogeneous expected costs, among two plan types.

3.3 Equilibrium Enrollment and MA Premium

• Equilibrium enrollment depends on the Medicare benchmark, which the authors call R. For now they assume plans are simply paid the benchmark.
• And of course risk adjustment is not perfect, and leaves opportunities for selection and upcoding.
• Medicare could ignore the equilibrium condition defining a level playing field and simply set a benchmark equal to average costs in TM as they happen to be at some point in time, but then, because enrollment depends on the benchmark, the resulting equilibrium will not in general satisfy the condition for a “level playing field.”.
• Thus, the authors know that for every value of qMA, the difference in average costs between MA and TM is greater in absolute value than the difference in marginal costs.

4. Rules for Bidding and Premium Setting: Putting a Kink in Demand for MA

• This section incorporates some Medicare rules about MA plan bidding and premium setting.
• At the close of this section the authors assess the evidence supporting the presence of the kink.
• Bids are supposed to be based on costs and allowable profits but the research literature regards the plans as having sufficient flexibility within the current regulations to choose the bid based on profit maximization.
• Medicare retains a share of the “savings” if the bid is below the benchmark.
• Figure 5 shows the original inverse demand, P(qMA), and the kink in the b(qMA) relationship because of the shift in the sharing rule at the enrollent corresponding to p = 0.

4.2 The MA Plan with Market Power with Bidding and Sharing

• The asymmetric sharing rule is not innocuous when the MA plan has market power.
• The authors have previously defined marginal cost as MCMA(qMA).
• Medicare could pay more or less to get to the same enrollment outcome q0.
• 28 The kinked demand and resulting discontinuous marginal revenue curve predicts a bunching up of equilibrium MA premiums at “zero” premium, i.e., no premium above or below the Part B premium.
• About 50% of beneficiaries are in plans with exactly a zero premium.

5. Discussion

• Setting the level of the benchmark subsidy to Medicare Advantage plans is Medicare’s most important decision for managing MA.
• A level playing field is not a goal, per se, but a policy choice, and their paper shows that once the goal of an efficient MA program is laid out explicitly, the level playing field does not emerge as the policy answer except in a special and unrealistic case.
• Papers studying where pass through is high and low are informative about the role of market power and the presence of a kink contributing to the story.
• There are some implications for other health insurance markets, particularly those, like the Marketplaces in the U.S., where there is a ranking of plans (e.g., Gold, Silver, etc.) that is likely to be connected to selection.
• Beneficiaries who elect TM are attributed to ACOs by an algorithm run by Medicare based on where the beneficiary gets their primary care.

Figures

Figure 6 shows the “profit-maximizing enrollment with bidding” as qπ−b in this case. When MR = MC in the range qMA > q 0, s < 1 and the following MR = MC condition applies:

Frequently asked questions

Q1. What have the authors contributed in "Paying medicare advantage plans: to level or tilt the playing field" ?

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 authors 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. Acknowledgements: Research for this paper was supported by the National Institute of Aging ( P01-AG032952 ). The first author would like also to thank the Henry Crown Institute of Business Research in Israel at Tel Aviv University for its financial support. The authors are grateful to Mike Chernew, Liran Einav, Randy Ellis, Amy Finkelstein, Bruce Landon, Tim Layton, Eran Politzer, Michael McWilliams, Joseph Newhouse and Richard van Kleef for helpful discussion. The views in the paper are the authors ’ own.