NCPA - National Center for Policy Analysis

Competitive Bidding Can Help Solve Medicare's Fiscal Crisis

February 22, 2012

A major reason Medicare faces a severe fiscal crisis is because it pays too much for basic benefits.  But chronic overpayment can be cured by harnessing market forces in the form of competitive bidding.  Competitive bidding for services would drive down costs of the government program while holding benefits stable for participants, say Roger Feldman, of the University of Minnesota, Robert Coulam, of the Simmons College School of Management, and Bryan Dowd, of the University of Minnesota.

  • According to the American Enterprise Institute, fully implemented competitive bidding would save 9.5 percent of Medicare spending (using data from 2009).
  • Because the Patient Protection and Affordable Care Act is expected to yield savings of 4.2 percent, the marginal percent savings expected from competitive bidding is reduced to 5.6 percent.
  • Nevertheless, by those standards, the implementation of such a policy would create savings of $339 billion over the next 10 years.

Savings on this level cannot be ignored, especially because it is widely believed that such a policy would not necessitate a reduction in basic benefits.  Rather it would maximize market efficiency, reduce bad incentives to overtreat, and decrease overpayment by requiring competitive prices.

It is important to take into account that competitive bidding will raise premiums for some seniors for plans that they currently hold.  However, the distribution of such increases is highly variable, with many participants facing no changes at all.

  • Forty-three percent of all enrollees would face no changes at all to their rates, causing no need to switch plans among that population if they are already satisfied with their level of care.
  • An additional 22 percent would face a premium increase of less than $40, meaning that almost two-thirds of all enrollees would face little disruption by staying with their current plan.
  • For the final third (35 percent) of enrollees who face payment increases of more than $40, competitive bidding will create numerous alternatives of comparable care that can be opted into in the place of current plans that face higher rates.

Source: Robert Coulam, Roger Feldman and Bryan Dowd, "Competitive Bidding Can Help Solve Medicare's Fiscal Crisis," American Enterprise Institute, February 16, 2012.

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