Don't Forget to Save Medicare: Competitive Pricing, Not Price Controls
About This Event

Medicare is the nearly forgotten stepchild of health care reform. Political attention has focused on the problems of the private insurance system, with little regard to the structural defects of Medicare that are pushing the program toward a fiscal crisis within the next decade. Under the major reform proposals before Listen to Audio

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Congress, Medicare's price controls would be tightened to pay for expanded health coverage for people under age sixty-five. In contrast, a switch to competitive pricing methods could produce greater budget savings, improve program efficiency, and make Medicare more sustainable into the future.

In a forthcoming book from AEI Press, Robert Coulam, Bryan Dowd, and Roger Feldman argue for replacing Medicare’s complex pricing formulas with a truly competitive pricing system. Modeled after a competitive pricing experiment they helped design for Medicare in the 1990s, their proposal would require private Medicare Advantage (MA) plans and the traditional fee-for-service Medicare to bid against each other without setting artificial benchmarks that favor one type of plan over another. Full competitive bidding would yield substantially greater savings than the Obama administration's proposal to increase competition solely among MA plans, which would cut program outlays by $177 billion over the next decade.

Could fully competitive pricing work in Medicare? Could Congress consider adding such a proposal to the contentious health care reform struggle? Following presentations by the authors, Robert Berenson (who previously directed Medicare's payment policy and contracting with Medicare's private plans), Jeff Lemieux (who served as the principal analyst for the National Bipartisan Commission on the Future of Medicare), and Bill Thomas (who cochaired the Bipartisan Commission while a member of Congress) will offer comments. AEI's Joseph Antos will moderate.

This forthcoming book is a part of an AEI book series entitled AEI Studies on Medicare Reform.

Event Summary

WASHINGTON, JULY 17, 2009--Medicare is rushing toward fiscal catastrophe with expenditures expected to exceed revenues in just eight years.  At an AEI conference on July 17, Robert Coulam of Simmons College and Roger Feldman from the University of Minnesota argued that the Obama administration's proposed Medicare pricing reforms fall short of addressing this crisis in two ways:  they would produce far lower savings than other pricing reforms, and they would misallocate Medicare funds.  Coulam and Feldman put forth a better alternative--full competitive pricing--that would save 8 percent of Medicare expenditures and would maximize efficiency in allocating the program's rapidly dwindling funds.

Medicare enrollees receive benefits by either enrolling in the traditional fee-for-service (FFS) Medicare program or choosing a private plan under Medicare Advantage (MA).  Coulam explained that Medicare bases its contributions to private MA plans roughly on the costs of the FFS Medicare plan.  However, this system does not make much sense since the government knows very little about the costs of providing insurance.

Arguing that Medicare should guarantee a set of benefits, not a particular system of financing or delivery, Coulam proposed that all Medicare plans--FFS Medicare and MA plans--within an area of the country submit bids and that the government determine its subsidy based on the lowest bidder, public or private.  Enrollees who desire plans costing more than the price of the lowest bidder would have to pay the difference.  This system would create strong incentives for plans to drive bids down to the cost of providing the benefit package, and it would also make beneficiaries sensitive to the costs of their choices.

In contrast, Obama's proposal only extends competitive pricing to MA plans, excluding FFS Medicare from the bidding process.  FFS Medicare plans would be subsidized without regard to their performance relative to MA plans also offering guaranteed benefits, inevitably and unfairly pushing many MA plans out of the market.  This favoritism for the government's plan perpetuates a major structural inefficiency in Medicare.

Competitive pricing has already been tested successfully in Medicare's Part D Program, which operates through competing private plans.  For that reason, a demonstration would only serve to delay meaningful change.  However, Coulam acknowledged certain political barriers.  "[MA] is not viewed as a fluid substitute for FFS," Coulam explained.  Moreover, some FFS Medicare beneficiaries would have to pay an additional premium to keep FFS Medicare if an MA plan was the most efficient in their area (and vice versa).  But Coulam asked, "is this less politically realistic than the alternatives which almost surely we'll have to do at some point--delaying the retirement age, cutting benefits across the board, cutting reimbursement?"

Feldman presented savings projections for different payment reforms.  Full competitive pricing would reduce Medicare outlays by 8 percent.  In contrast, Feldman estimated that "the most aggressive variant" of Obama's proposal would cut Medicare spending by only 2 percent.  The president's budget projects that his proposal would save $175 billion over the next decade, far less than full competitive pricing would save.

Jeff Lemieux, senior vice president of America's Health Insurance Plans' Center for Policy and Research, discussed a report analyzing HMO plans within the MA program.  He showed that these plans meet certain goals more efficiently, on average, than FFS Medicare.

Robert Berenson, M.D., a fellow at the Urban Institute, elaborated on differences between FFS Medicare and MA plans. While FFS Medicare has greater pricing power and lower administrative costs (possibly too low, Dr. Berenson suggested), private plans can exclude providers from their networks.  Dr. Berenson said competitive pricing "has an academic appeal but is completely a nonstarter."  He emphasized that one result of full competitive pricing would be that "some parts of the country would have basically private plans and no any-willing-provider plans while other parts of the country would have basically traditional Medicare, and I'm not sure that's a good outcome."

Feldman disagreed with Dr. Berenson's contention that having only FFS or MA in a certain area of the country would present a problem.  Coulam echoed Feldman's rebuttal, explaining that "to do competitive pricing…you do indeed need to be indifferent as to who wins."

Throughout the discussion, Bill Thomas, visiting fellow at AEI and former chairman of the House Ways and Means Committee, emphasized political realities.  He quipped, "When the entire structure is ten thousand decisions by CMS [the Centers for Medicare and Medicaid Services] on who gets what, when, and how, that is called the political process."
Coulam and Feldman's proposal will be included in their book, It's Time to Bring Competitive Pricing to Medicare (AEI Press, forthcoming), in the series, AEI Studies on Medicare Reform.  A Health Policy Outlook on this subject is available at here.


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Speaker biographies

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI. He also is a commissioner of the Maryland Health Services Cost Review Commission and an adjunct professor at the School of Public Health of the University of North Carolina at Chapel Hill. Mr. Antos's research focuses on the economics of health policy, including Medicare reform, health insurance regulation, and the uninsured. He is the editor with Alice Rivlin of Restoring Fiscal Sanity 2007: The Health Spending Challenge (Brookings Institution Press, 2007). Before joining AEI, Mr. Antos was assistant director for health and human resources at the Congressional Budget Office, and he held senior positions in the U.S. Department of Health and Human Services, the Office of Management and Budget, and the President's Council of Economic Advisers.

Robert Berenson, M.D., is an institute fellow at the Urban Institute. He is an expert in health care policy, particularly Medicare, with experience practicing medicine, serving in senior positions in two administrations, and helping organize and manage a successful preferred provider organization.
From 1998 to 2000, he was in charge of Medicare payment policy and managed care contracting in the Health Care Financing Administration (now the Centers for Medicare & Medicaid Services). In the Carter administration, he served as an assistant director of the domestic policy staff. He was also national program director of Improving Malpractice Prevention and Compensation Systems, a grant program funded by the Robert Wood Johnson Foundation, from 1994 to 1998. Dr. Berenson is a board-certified internist who practiced for twelve years in a Washington, D.C., group practice and is a fellow of the American College of Physicians. He is also an adjunct professor at the University of North Carolina School of Public Health and the Fuqua School of Business at Duke University. He is coauthor, with Walter Zelman, of The Managed Care Blues and How to Cure Them (Georgetown University Press, 1998). Dr. Berenson's current research focuses on modernization of the Medicare program to improve efficiency and the quality of care provided to beneficiaries.

Robert Coulam is a professor of health care research at Simmons College and has been an academic and researcher for almost thirty years. He was formerly a principal associate at Abt Associates, where he managed large-scale research and evaluation projects on Medicare and Medicaid policy issues. He has been active in research efforts supporting recent federal initiatives to reform the Medicare program. Mr. Coulam's work has been published in Health Services Research, Health Affairs, Health Care Financing Review, and other health services research journals. At Simmons, his primary responsibilities are to teach courses in health policy, law, and economics and to enhance the health program's research activities and funding. He also does work on international human rights, focused on issues of interrogation, morality, and terrorism.

Roger Feldman is the Blue Cross Professor of Health Insurance and Professor of Economics at the University of Minnesota. His research examines the organization, financing, and delivery of health care with a focus on health insurance. He also studies competition among health care providers and insurers. Currently, he is evaluating the effect of consumer-directed health plans on medical care utilization and personal saving decisions. Mr. Feldman's experience in health care policy includes serving on the senior staff of the President's Council of Economic Advisers, where he was the lead author of a chapter in the 1985 Economic Report of the President. From 1988 to 1992, he directed one of four national research centers sponsored by the Centers for Medicare & Medicaid Services (CMS). He advised CMS on the design of a demonstration of competitive pricing for Medicare M+C plans and, recently, provided advice to the assistant secretary for planning and evaluation at the U.S. Department of Health and Human Services on the potential for health savings accounts to increase the number of people with insurance in the United States. Mr. Feldman is a regular contributor to journals in economics and health services research. His research has received four “best paper” awards from the Association for Health Services Research and the National Institute for Health Care Management. He has been a consultant to the U.S. Department of Justice and several state regulatory agencies regarding health plan mergers and ownership changes.

Jeff Lemieux is the senior vice president directing America's Health Insurance Plans' new Center for Policy and Research. Previously, Mr. Lemieux was the executive director of Centrists.Org, a small think tank dedicated to pursuing bipartisan policy solutions. Before founding Centrists.Org in 2003, Mr. Lemieux worked as a senior economist for the Progressive Policy Institute, where he was responsible for studies of overall economy, including federal budget, tax, and entitlement issues, as well as health care. In 1998 and 1999, Mr. Lemieux served as the staff economist for the National Bipartisan Commission on the Future of Medicare, which was cochaired by Senator John Breaux (D-La.) and Representative Bill Thomas (R-Calif.). Before joining the commission, from 1992 to 1998, Mr. Lemieux was with the Congressional Budget Office, where he estimated the cost of national health reform plans and, later, the impact of Medicare reforms enacted in the Balanced Budget Act of 1997 and other laws. An economist specializing in health care and public finance, he is the author of centrist proposals for health coverage, Medicare reform, and balanced budgets and creator of long-term projections of entitlement spending and federal budgets used by Congress and the policymaking community. He has testified before the House Ways and Means Committee, the Senate Finance Committee, and other committees in Congress on Medicare reform, tax-based proposals to expand access to health coverage, chronic care management, and other topics.

Bill Thomas, former chairman of the U.S. House Ways and Means Committee, is a visiting fellow at AEI. He served in the U.S. House of Representatives from 1978 to 2007, most recently representing California's Twenty-second Congressional District, which covered most of Kern and San Luis Obispo Counties and part of Los Angeles County. Mr. Thomas was elected chairman of the House Ways and Means Committee in January 2001 and served until January 2007. During his chairmanship, he guided the enactment of $2 trillion in tax relief, including the Economic Growth and Tax Reconciliation Act of 2001, which reduced all ordinary income tax rates; the Jobs and Growth Tax Reconciliation Act of 2003, which reduced the tax rate on dividends and capital gains; and the Job Creation Act of 2004, which provided significant reforms for corporate tax policy. Prior to his election as chairman of the Ways and Means Committee, Mr. Thomas served as chairman of the Ways and Means Health Subcommittee. He was also chairman of the House Administration Committee from 1995 to 2001. Before entering Congress, he was a faculty member at Bakersfield Community College and a member of the California State Assembly.


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