No issue in health reform is more pressing today than the challenge of containing costs while ensuring access to high quality health care in federal programs, including Medicare.
However, Medicare is in financial jeopardy. By 2017, Medicare's trust fund will be depleted, and the program will be unable to cover the full costs of health services for 57 million seniors and disabled beneficiaries. How can we put Medicare on a more sustainable financial footing? A groundbreaking study from the American Enterprise Institute outlines a competitive pricing system that could reduce Medicare spending by 8 percent, shoring up the program's finances while empowering consumers to make sensible choices about their health care.
In Bring Market Prices to Medicare: Essential Reform at a Time of Fiscal Crisis (AEI Press, December 2009), Medicare policy scholars Robert Coulam, Roger Feldman, and Bryan E. Dowd argue that one reason for Medicare's impending insolvency is that it simply pays too much for services; the solution is to use market-based arrangements to set prices for both traditional fee-for-service (FFS) Medicare and private Medicare Advantage (MA) plans.
Coulam, Feldman, and Dowd argue that the government should pay only the cost of the most economical health plan in each market area. To accomplish this, FFS Medicare and MA plans would submit bids for Medicare's business, and the government's contribution to premiums would be set to equal the lowest bid in each market area. This competitive pricing system, which is used widely in other public and private programs nationwide, would reduce Medicare costs by 8 percent, fully four times as much as all other pricing options currently under consideration by policymakers. This is the only reform proposal that would produce substantial cost savings while preserving Medicare's full range of benefits.
Bring Market Prices to Medicare highlights the following advantages of a competitive pricing system for Medicare:
* For decades, Medicare has based its premium contributions to MA plans on the cost of the FFS Medicare plan, rather than paying MA plans at levels that more closely reflect their own operating costs. This approach has well-known problems: It virtually guarantees misallocation of resources because the federal government sets prices without considering (or even knowing) the actual costs of care.
* A competitive pricing system would reverse this flow of information, allowing MA plans and FFS Medicare to determine premium contributions through a bidding process based on the actual cost of providing entitlement benefits to beneficiaries.
* Competitive pricing would penalize plans that bid too high--their customers would have to pay higher premiums--providing an incentive for plans to offer their best prices. Meanwhile, low-bidding plans would be rewarded with increased enrollment.
The most controversial part of the authors' proposal is their contention that Medicare should guarantee a set of benefits, not a particular way of financing or delivering those benefits. Under their competitive pricing proposal, beneficiaries in some markets would have to pay more to stay in the FFS Medicare plan, while others would lose generous supplementary benefits currently offered by private MA plans in areas where these plans are overpaid. Although some might consider these changes unfair, a gradual transition to competitive pricing would alleviate most of the disruption beneficiaries might otherwise experience.
Is this proposal politically practical? Coulam, Feldman, and Dowd assert that the best way to address opposition to this crucial reform is not to downplay its challenges but rather to acknowledge them, consider carefully the needs and expectations of beneficiaries, and establish a gradual transition that avoids abrupt changes. Creating a competitive pricing system will not be merely a matter of political strategy or tactics; it will require a fundamental shift in Americans' attitudes toward health care, starting with the realization that Medicare's payment methods cannot be sustained.
Bring Market Prices to Medicare shows that the current system is not only unfair--providing generous government benefits to some MA enrollees and not to others--but is moving quickly toward insolvency. Saving 8 percent of Medicare's budget through competitive pricing will not eliminate its financial problems--but it is a significant step in the right direction.
