Academic journal article AEI Paper & Studies

A Competitive Bidding Approach to Medicare Reform

Academic journal article AEI Paper & Studies

A Competitive Bidding Approach to Medicare Reform

Article excerpt

Medicare reform is a critical issue for the public agenda. The most promising option for addressing Medicare reform is competitive bidding--using health plans' bids to determine the government's contribution to a basic set of benefits in every market area.

Competitive bidding proposals have a long history in Medicare. (1) Competitive bidding brings market pricing to Medicare, but providers have resisted this system for decades. What is different now, and what makes competitive bidding a realistic alternative for discussion, is that Medicare reform is an urgent matter and competitive bidding is a tested means for changing the financial prospects of the program. Competitive bidding is not the only necessary Medicare reform, but it is an essential component.

We begin this paper with a review of the history of competitive bidding in Medicare. Then we move to a definition of terms, which is crucial in any discussion of competitive pricing because the often-heated public debate around these issues frequently distorts positions and confuses issues by conflating different terms and making some arguments appear other than they are. Following this terminological exercise, we move to a series of sections discussing competitive bidding in Medicare, with special focus on the challenges to introducing it.

In the course of this discussion, we show that competitive bidding has been extensively tested in Medicare applications. It should be relatively easy to implement because so many steps required of the Medicare program already are in effect without notable problems. And it is amenable to political consensus because it allows decisions on key parameters to accommodate widely different political judgments. Put differently, competitive bidding is not a right-wing or left-wing approach. It can be adapted to choices all along the political spectrum and still bring at least some benefits of market pricing to the Medicare program.


At a minimum, competitive bidding requires bidders: multiple, identifiable "health plans" that are able and willing to submit bids to provide some defined health care benefit. We will define these terms with greater precision in due course. For now, it is worth considering the history of their use.

Nothing about private health plans in the Medicare program is new. Private plans have been offered to Medicare beneficiaries since its inception in 1965. (2)

Nor is anything new about proposals that use competitive bidding. Ralph Saul of the Insurance Company of North America (INA) first proposed a fixed government contribution to Medicare premiums based on health plans' bids in 1979. (3) Walter McClure made a similar proposal in 1982, followed by Alain Enthoven in 1988. (4) Researchers at the University of Minnesota developed a detailed competitive bidding proposal for the Centers for Medicare and Medicaid Services (CMS), then the Health Care Financing Administration (HCFA), in the late 1980s and later assisted CMS in attempts to demonstrate competitive bidding in four US cities during the Clinton administration. (5)

Years later, we showed that competitive bidding had been attempted almost constantly since the program's founding for many different parts of the Medicare benefit--including Medicare health maintenance organizations (HMOs) for Part A and B benefits; prescription drug plans for Part D benefits; and particular elements of coverage such as durable medical equipment (DME), clinical laboratory services, and coronary artery bypass grafts. (6) Bidding designs were employed in these efforts, and in all of them, competitive bidding proved to be practical and (when bids were received) more economical than the standard pricing arrangements of the traditional Medicare program. However, almost all of these efforts were unsuccessful, largely because of the politics of Medicare or judges acting at opponents' behest to block the programs. …

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