Should Medicare Rely More on Market Competition?: What the Healthcare Market Will Bear

Generations Guest Editors Tricia Neuman and John Rother devised and posed the questions in this discussion between Joseph Antos, Wilson H. Taylor Scholar in Health Care and Retirement Policy of the American Enterprise Institute in Washington, D.C., and Thomas Rice, Distinguished Professor of the UCLA Fielding School of Public Health’s Department of Health Policy and Management in Los Angeles, California.


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Generations: In your opinion, what are the biggest challenges facing the Medicare program, and is the current structure of the program up to meeting these challenges?

Joseph Antos (JA): One cannot overstate the importance of Medicare in shaping the future of healthcare for all Americans. Medicare is the largest health insurance program in the United States, covering more than 50 million beneficiaries at a cost exceeding $600 billion—one-sixth of the federal budget. The program’s rules drive business decisions that directly influence what services are delivered, how they are delivered, and what they cost for people who are Medicare beneficiaries, as well as for those who are not. An unreformed Medicare impedes progress throughout the health system.


Medicare’s major challenges include:

  • Fiscal sustainability. The recent slowdown in health spending, including Medicare spending, is mostly due to six years of a weak economy and does not signal victory over excess cost growth. The onslaught of aging baby boomers will create unprecedented cost pressures that the current program is ill-equipped to handle.
  • Value, not volume. Slower spending growth does not necessarily mean better spending. Sometimes less really is less.
  • Efficiency and innovation. Top-down regulation discourages adoption of new approaches to healthcare and it reinforces the dominance of existing provider organizations. Lack of program flexibility impedes progress even when Medicare tries to promote delivery innovations.
  • Realistic expectations. The public has come to believe that Medicare guarantees full access to high-quality care at little or no cost to them. Policy makers thinking about their next election rarely find the political will to discuss the program’s serious limitations, much less act to resolve them.

Medicare’s current structure is an amalgam of different kinds of health financing approaches that have not adapted well to the changing healthcare market. Traditional Medicare remains an insurance program out of the 1960s whose fee-for-service incentives and, in conjunction with Medigap coverage, first-dollar coverage promote overuse and raise costs without improving outcomes. Medicare Advantage offers a potentially more efficient alternative, but more direct competition and smarter program rules are needed. Tom, what did I miss?

Thomas Rice (TR): I think you covered many of the key challenges going forward, Joe. I fully agree that it’s important that we not get complacent just because healthcare costs have been stable for a few years. The recession, however, is not the only reason spending increases have subsided. Outside of the Medicare program, patient cost-sharing—particularly, high deductibles—have been rising precipitously, quelling demand. In Part D, many analysts point to the lack of new, expensive blockbuster drugs—albeit that was before the extraordinarily expensive ($1,000 a pill) drug for hepatitis C hit the market. With advances in genetic therapy, it’s not hard to imagine that we are moving from the calm to the storm. And a number of analysts, although probably not you, believe that the Affordable Care Act is helping keep costs down.

Even within Medicare, there are some encouraging, if modest, trends. More beneficiaries are enrolling in Medicare Advantage plans with better-rated quality. Readmission rates for heart attacks, heart failure, pneumonia, and hip and knee replacements all have fallen. Early evidence from Medicare accountable care organizations points to somewhat better quality than in the fee-for-service program.

That said, there is much work to do. Geographic variation is rife, meaning that in some geographic areas Medicare is spending far too much for the care it provides to beneficiaries. Medicare is certainly partly to blame. Like others, I was shocked when I first read Atul Gawande’s New Yorker parable (Gawande, 2009) about McAllen, Texas, which spends more per person on Medicare than anywhere else in the country, in a county with quite low average household income. But later research indicated that McAllen apparently was not an outlier in its spending for privately insured patients, implying that the Medicare fee-for-service program was itself at fault.

I don’t agree, though, with your belief that raising out-of-pocket costs or prohibiting first-dollar supplemental coverage is the answer. Study after study shows that making people pay more for their care and medications reduces use of services that are critical for their health; it particularly harms medication adherence. I would prefer to see more efforts on the supply side of the market: making more use of global budgets and bundling of services; getting serious about training primary care doctors and rewarding the services they provide; and, taking advantage of lessons from behavioral economics to motivate providers in ways that may be more effective in promoting value than small financial incentives at the margin, emblematic of pay-for-performance programs.

JA: If we hope to have a sustainable Medicare program, we must make structural changes that simplify and rationalize the choices given to beneficiaries. What sense does it make to charge seniors a deductible exceeding $1,200 when they are admitted to the hospital, but less than a $150 deductible for the use of physician services? Certainly, a senior can choose Medicare Advantage and avoid the irrationality of traditional Medicare’s cost-sharing structure, but reform would make it easier for seniors to navigate the program and make the best decisions for themselves. That does not mean outlawing first-dollar supplemental insurance, but purchasers would bear the additional costs imposed on Medicare by such coverage.

Seniors need to be more aware of their alternatives and be better shoppers. But I agree that we have to work on both sides of the market. Bundled payment, centers of excellence, quality standards, and other ideas need to be developed to give traditional Medicare management tools to promote smarter clinical choices and more efficient healthcare delivery. Back in the early 1990s, when I was running the equivalent of the Centers for Medicare & Medicaid Services Innovation Center, we were working on many of those ideas, so I recognize the technical and political challenges of making such tools part of the program’s operating procedures. Successfully implementing such approaches in traditional Medicare can also have a synergistic effect, with Medicare Advantage plans and private plans outside of Medicare adapting similar tools for their specific environments.

TR: Joe, we are in total agreement about these issues. I concur that many of Medicare’s problems are rooted in the original design of its fee-for-service program. Just because Parts A and B are financed separately doesn’t provide a justification for having a bifurcated benefit structure. As you suggest, at a minimum there should be a common deductible, as has been the case in private health insurance from its inception sixty years ago. The most harm of the fee-for-system structure, however, is the need for supplemental insurance. Had Congress put in an annual out-of-pocket maximum, or had the 1988 Catastrophic Coverage Act not been repealed, there would be far less need for Medigap policies for those not fortunate enough to have retiree coverage from their employers.

I was glad to see that you, too, are interested in reforming the supply side of the market. But as you say, the demand side is critical too, so I want to echo your call for making it easier for Medicare beneficiaries to be effective shoppers. I would be interested in your take on the following proposal, which surely is one that will face challenges from the insurance industry.

The vast majority of Medicare beneficiaries are several hundred dollars a year poorer because they are not choosing the cheapest Part D plan, given the drugs that they take. There are several reasons that a beneficiary may choose a more costly plan—brand recognition and service, unwillingness to spend time researching and switching plans, or an expectation that their drug regimen will change the next year. But how about we let Medicare do the research for everyone, and inform each, during open enrollment, of the drug plan in their areas that would have the lowest total costs (premiums plus copays) given the drugs they currently take, and how much they would save by switching? Not only would this be an eye-opener for beneficiaries, but it might really spur some price competition. I don’t mean to pick on one company, but there are many people who purchased Humana plans the first year when they were cheap and have kept on renewing them in spite of some precipitous premium increases.

JA: Tom, you raise a good point. Automatic re-enrollment is convenient but leaves consumers in a plan that may no longer be the best deal in terms of price or access to services. Belatedly, the Administration has realized this for the Affordable Care Act insurance exchanges. CMS offers a website where you can enter your own information to get the projected cost of prescriptions offered by different plans. Many seniors find it difficult to use. The idea of giving everyone information based on their actual usage of prescriptions without them having to exert much effort makes sense. To avoid confidentiality problems, let beneficiaries opt in with a private firm that could obtain prescription information directly from the Part D plans. Making it easier to change plans would increase competition in an already highly competitive market.

Generations: You’ve both written extensively on the topic of premium support—one among many options that could be considered by Congress to control the growth in Medicare spending. Joe, can you paint a picture so our readers can get a better sense of what a premium support system would (or should) look like? Also, please briefly explain what you see as the opportunities and risks of this approach.

JA: Premium support relies on changed incentives and enhanced competition to promote efficiency and slow the growth of spending in the Medicare market. The major features include:

  • Choice of plans. Private plans and traditional Medicare would be available to all beneficiaries, although the traditional program would adopt reforms of the sort we have been discussing.
  • Competitive bidding. All plans, including traditional Medicare, would submit bids reflecting the cost of covering a defined set of services—at least the services offered by Medicare Part A and Part B—in each local market.
  • Defined contribution. Beneficiaries would receive a fixed-dollar subsidy based on the plan bids. Beneficiaries selecting more expensive plans would pay the additional premium cost themselves.
  • Regulatory flexibility. Premium support is not simply shifting Medicare financing from defined benefit to defined contribution. Plans need greater authority to adopt cost-saving innovations without having to work around regulations that reinforce the inefficiencies of the current system.

Traditional Medicare would remain available to anyone who wants it, and initially the traditional program would dominate less populated areas. With the adoption of telemedicine and lower federal and state regulatory barriers, we can expect to see health plan competition and more efficient models of healthcare delivery spread to such markets.

Medicare beneficiaries would become more aware of the cost of their care and will have an incentive to investigate their plan options more carefully. That does not mean costs are simply shifted to seniors. Health plans competing in a premium support system would recognize that they cannot simply pass ever-rising costs onto a population whose incomes essentially are fixed. To gain market share, health plans will have to keep costs under control while offering coverage that is attractive to consumers.

With incentives for lower cost on both the demand and supply sides of the market, premium support promotes efficiency and cost-saving innovation that could transform healthcare delivery. Health plans, including traditional Medicare, would need greater flexibility to adopt new payment methods and business structures, since no plan would generate additional revenue by providing an additional test or procedure.

Can savings be obtained? Recent proposals tie growth in the subsidy to the economy, but efficiency improvements may not keep up. A spending target can be a useful spur to industry, but it does not guarantee actual reductions in unnecessary spending. If the target is set too low, Congress likely will override it, as in the Sustainable Growth Rate. Congress is more likely to set an overly generous target or fail to enforce a reasonable one. However, the driving force behind savings is competition, not top-down financial controls.

Can Medicare beneficiaries make good plan choices? Given useable information about their options and a consumer-friendly enrollment process, there is no reason to think that seniors are less willing or able as a group to shop wisely for insurance. Half of new Medicare enrollees select Medicare Advantage plans instead of traditional Medicare, clear evidence that they compared the options and chose better alternatives. As mentioned earlier, we need better information on plan choices and a consumer-friendly enrollment process to make Medicare work.

Will low-income beneficiaries be hurt? Congress would have to set a subsidy policy that ensures low-income beneficiaries have affordable, high-quality plan choices. Medicare already charges higher income enrollees higher premiums. It is a short step to a more explicit policy that provides greater financial help to those who need it the most.

TR: Joe has provided an excellent summary of how premium support is designed to work and several of the key challenges that it faces. While I have opposed previous efforts to move to premium support, this is not because the idea lacks merit so much as [it is] with particular concerns. Before going into them, let me say that the idea of having traditional Medicare and Medicare Advantage plans directly compete, as Joe lays it out, makes a great deal of sense—and it could indeed spur traditional Medicare toward reforms that would reduce the provision of wasteful services. Some beneficiaries will want the breadth of network that comes with traditional Medicare, while others will prefer particular managed care plans that have more limited provider choice, but which may also provide additional benefits and potentially lower premiums. If the combination of breadth of provider network and benefits that a person wants costs more, it makes sense that they should pay more in premiums.

It’s not the theory of premium support that concerns me, it’s translating the theory into reality. There are several issues, but let me start with a fundamental concern: is the program we are considering really premium support, or is it instead defined contribution? They are not the same. Under premium support, if premiums go up across the board, then Medicare’s contribution goes up in tandem so beneficiaries are not left in the lurch. Unfortunately, most proposals don’t respect this tenet. The concerns below still apply to a pure premium support program, but this one is fundamental: if Congress puts a cap on the annual growth rate of the per-beneficiary subsidy, as it almost surely would, then the risk of future growth in healthcare expenditures is being shifted unfairly to beneficiaries.

There are other concerns, some of which can be ameliorated by specific plan design features, but others that cannot. First is the fact that risk adjustment is far from perfect. In previous work, we’ve shown that if (as is the case) risk adjustment works only partly, and if traditional Medicare obtains an unhealthy mix of enrollees, then a premium death spiral may result [within] traditional Medicare. This would be harmful mostly for those with severe and costly health issues.

Second is beneficiaries’ ability to choose the best plans for themselves. There is a lot of research showing that they leave a good deal of money on the table and are reluctant to switch plans. In the Medicare Part D market, this has led to many people continuing to pay very high premiums for plans that were a bargain in 2006, but since that time have lost their competitive advantage. What keeps them popular is no more than status quo bias.

A third concern is related: health, health insurance, and literacy. Premium support puts the risk on beneficiaries to make the right choices, but certain groups are at a disadvantage due to lower education or socioeconomic status, cognitive impairments, and the like. A final concern is whether the government contribution will be the same in high- and low-cost parts of the country or, if instead, it will be geographically based. This issue is so involved we could spend the entire discussion here on it, but either way it is done, problems will arise.

In sum, before supporting a transformation to premium support, I would like to see how specific proposals deal with these concerns.

Generations: What are the opportunities and risks of promoting more competition within Medicare? What are the trade-offs of making Medicare more competitive?

JA: Introducing full, fair competition among health plans in Medicare would move us toward the consumer-focused system of coordinated care that everyone talks about, but few achieve. Plans and providers would have a strong incentive to find better ways of delivering care that reduce unnecessary cost and produce better outcomes—in other words, ways to increase the value of their coverage to consumers. Unlike the current highly regulatory model of Medicare, a competitive approach would give plans flexibility to innovate while providing sufficient oversight to ensure that consumers receive appropriate care.

As part of that innovation, health plans would adopt a broader array of strategies to improve the individual’s overall health status at lower cost and with greater convenience to consumers. Plans would adopt ways to encourage individuals to become active partners in improving their own health. Being an active consumer in a fully competitive system means more than just picking a plan once a year.

At its best, a fully competitive Medicare program can slow the growth of total spending and encourage the adoption of better ways to deliver care. Unlike the current system, the decision about how much to spend would not be hidden in complex payment rules and obscure regulations.

Consumers would have a direct say in the matter by their choice of plans, and policy makers would have to make explicit decisions about the amount of subsidies and how they should be distributed to people of varying economic means. The scarcity problem common to all health systems would become the subject of public debate rather than remaining solely the province of a few experts and decision makers. That won’t make the resource allocation decision easier, but it will be more honest.

We’ve already addressed some of the major risks of premium support, which, as Tom said, depend on the specifics of implementation. With a poorly designed reform, low-income enrollees might lose access to care [at a level] that the public considers unacceptable. Efficiency savings might not be sufficient to maintain a level of benefits that the public would prefer. Consumers might have difficulty making good decisions about health plans, and they might stay with a plan even if their personal circumstances change.

These are solvable problems, but there is no cookie-cutter approach to implementing a fully competitive reform of Medicare. The program and the health sector will need enough flexibility to make midcourse corrections. Consumers and healthcare providers need time to understand the new system. This is a cultural change with far-reaching consequences, not just a minor tweak in the program with little long-term payoff.

The risks of staying with the current system outweigh the risks of moving to competition. The top-down regulatory approach of Medicare discourages innovation. Overly stringent requirements and unrealistic time frames discourage plans and providers from trying new approaches that could have a big impact on cost and outcomes. Holding onto the fee-for-service approach, which treats enrollees as a series of disconnected payment codes rather than as whole individuals whose health depends on a team (including themselves and their families), is folly.

Even with the recent slowdown in Medicare spending growth, “business as usual” is unsustainable over the long term. Rather than waiting for the next fiscal crisis to adopt needed reforms, we should start now to lay the foundation for the Medicare program for the next fifty years.

TR: Joe has provided a strong case for Medicare reform. The reforms he would like to see rely mainly on the workings of a competitive marketplace. That certainly has been the direction the program has taken in recent years, and further proposals to introduce more competition into Medicare deserve careful consideration.

I, too, would like to see a less cumbersome program, one that both encourages quality improvement and cost containment. We differ on the path to achieve these things. Unlike Joe, I would like to see Medicare become a more prudent payer by following the lead of most other developed countries, using its market power to drive better payment deals with providers and for pharmaceuticals.

One thing that concerns me about relying more on competition among insurers—the main tenet of managed competition—is that the bargaining power of purchasers in their negotiations with providers will be further diluted. I would invite interested readers to check out the International Federation of Health Plans’ 2013 Comparative Price Report, which shows how much more private health plans in the United States pay for twenty-one different procedures and drugs compared to how much is paid in several other countries. To give an example from a procedure, the average price paid for an angio plasty in the United States was about $28,000, more than five times as much as in the Netherlands, three times as much as in Australia, and two-and-a-half times as much in Switzerland. The price paid for the drug Nexium is five times the average of four European countries for which data are reported, and the price of [the drug] Celebrex is double.

While it is much harder to compare quality of care than prices, none of the international evidence gives me confidence that competition among U.S. insurers is providing superior care to that received in other developed countries. In sum, I have seen little compelling evidence that increased competition, particularly among insurers, will provide the value that we are seeking from Medicare.

Editor’s Notes:

The entire Summer 2015 issue of Generations is available on AgeBlog thanks to the generous support of The Benjamin Rose Institute on Aging, Compassion & Choices and Robert Wood Johnson Foundation President's Grant Fund of the Princeton Area Community Foundation. Click here to read more.

This article is taken from the Summer 2015 issue of ASA’s quarterly journal, Generations, an issue devoted to the topic, “Medicare at 50.” ASA members receive Generations as a membership benefit; non-members may purchase subscriptions or single copies of issues at our online storeFull digital access to current and back issues of Generations is also available to ASA members and Generations subscribers at Ingenta Connect. For details, click here.


Gawande, A. 2009. “The Cost Conundrum: What a Texas Town Can Teach Us About Health Care.” The New Yorker, June 1. Retrieved March 10, 2015.