As noted in Part II, Medicare’s annual open season not only delivers far less choice and competition than advertised, it also costs taxpayers more.

Longstanding wishes by a handful of right-of-center Medicare reformers for level-playing-field competitive bidding, by both Medicare Advantage (MA) plans and the traditional fee-for-service (FFS) program, have been ignored or rebuffed for several decades. On one side, defenders of FFS and its beneficiaries worry that their favorite brand of the program would be squeezed for resources if bidding solely on basic Part A and Part B services in many parts of the country then set financial subsidies for FFS at the level of the lowest local area bid (or maybe even the average weighted bid). Yet private MA plan insurers don’t really want to compete on pure efficiency alone either. They would rather use any cost differential in their bidding to be redirected toward “service” competition in the form of extra benefits and lower cost sharing, compared to FFS.

The resulting political equilibrium has settled into one-sided bidding. When MA plans succeed in underpricing FFS for the basic benefits, they then use most of that differential to attract additional new customers. They offer “more” than FFS—at a higher cost to taxpayers—rather than the “same” at a lower cost. With something for each home team. FFS stays in business on its own trajectory, while MA plans get paid even more than that basic cushion (courtesy of still slightly inflated payment benchmarks) to offer some additional goodies. Members of Congress even get credit for increasing benefits without having to vote for them.

Fixing this is easier in economic theory than in political practice. The purest version—competitive bidding that only finances the more efficient and economical bids—has far more opponents than proponents. A softer version of beneficiary-based transparency might just pay across the board at FFS levels but place any extra cash differential in bids for basic benefit costs initially in the hands of Medicare enrollees. Then enrollees could decide whether they might prefer to use most, but not all, of the money for the program’s health care services while keeping the rest for other spending priorities in their lives.

This would not necessarily put much of a brake on higher health care spending by the elderly, given current habits and preferences. Moreover, a good chunk of MA bidding rebates already help lower supplemental coverage premiums and reduce cost sharing, which are essentially “cash refunds” with a health care spending bias. 

Unless and until the traditional Medicare program displays more signs of modernized, efficient delivery of care, it will suffer from a cost differential with private MA insurers in providing the same level of benefits. Over the last two decades, we have chosen to maintain that differential at a higher base level of spending, in order to preserve most of the benefits previously promised to FFS enrollees. Fixing more of the FFS program’s comparative deficiencies (lack of catastrophic cost protection, unifying its siloed cost sharing, and modernizing benefits) not only would be more likely to make the traditional program more costly, but it would ratchet up MA payment rebates equivalently under current rules.

For now, each end of the Medicare program is most likely to stick with its respective tools and tactics. FFS will rely far more on periodic adjustments in provider payments to limit costs, while searching for the holy grail of accountable value-based care guided by a politically conflicted bureaucracy. MA plans still prefer bidding and payment rules that generate sufficient taxpayer rebates to offer more attractive supplemental benefit packages to new cohorts of eligible enrollees. Medicare program administrators may push for incremental reforms in payment practices to discourage strategic behavior by MA plans to maximize their advantages, but private entrepreneurs tend to play that cat-and-mouse game faster and better.

The parameters for this pseudo competition in draining the resources of younger and future taxpayers and debt payers has to shift someday, but it will be later rather than sooner. Policymakers fear both discomforting FFS beneficiaries (at least transparently) and disrupting the extra benefits available by overpaying MA plans far more than facing sooner the longer-term effects of borrowing more from the future. Nearly six decades of Medicare’s political economy suggest the bark of program administrators is stronger than their bite. There’s more elastic in the program’s “wasteband” of financial capacity and political support to go before they both snap back more dramatically under less-escapable duress.

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