Daniel P. Kessler on Depoliticizing Medicare

Published September 24, 2012

Daniel P. Kessler offers a highly original take on addressing Medicare cost growth in the new National Affairs. His basic diagnosis is that Medicare is a victim of Congressional micromanagement, that both the Independent Payment Advisory Board (IPAB) in the Affordable Care Act and premium support are design to insulate cost containment from politics. IPAB aims to achieve this by creating an alternative route to payment reform, albeit one that can be overridden by Congress relatively easily. Premium support, in contrast, aims to empower competing providers to embrace productivity-enhancing business model innovations outside the purview of the Medicare FFS mothership.

And so, Kessler argues, premium support is both more promising as a strategy to contain costs and more politically threatening:

Competitive pricing is not inconsistent with the current structure of Medicare — but it is inconsistent with Congress’s interests. Again, the problem is politics. Administrative pricing creates opportunities to make decisions that favor narrow groups of providers, thereby giving politicians valuable benefits to distribute to their advantage. A series of articles in Health Affairs by researchers from the Medicare Payment Assessment Commission (also known as MedPAC) — an independent agency that advises Congress on Medicare policy — offers several examples of providers’ using the political process in this way. Many of Medicare’s administrative prices exceed market prices for the same goods and services, leading providers to furnish more of these “profitable” services than beneficiaries need. This system may be good for providers, but it is harmful to patients: In addition to causing wasteful spending, unnecessary procedures increase the risk of medical errors.

Premium support breaks this link between politics and pricing in a way that IPAB and bundled payment do not. Once the value of the overall support payment is determined, the myriad individual prices that the competing insurance plans pay and charge will be determined by the market. Different insurers will offer different approaches to care; consumers will see what most appeals to them. And the result of that process is more likely to be politically stable. Under traditional Medicare, providers who oppose competitive pricing have no natural counterparty pushing against them; under premium support, however, both insurers (who would claim some of the residual profits of successfully competing for customers) and beneficiaries (who would share in efficiency gains through lower premiums) would play this role.

Premium support would make use of markets on the demand side as well. Insurers would be forced to offer good value relative to their competitors; if they failed to do so, they would lose customers’ business. Beneficiaries, too, would face tradeoffs: between the extra features of more expensive coverage and their own money (in the form of savings from unspent premium subsidies or out-of-pocket spending for premiums above the legislated support level). Premium support would thus encourage innovation in spending-control techniques in ways that the current system does not — techniques that could be useful throughout the American health sector, not just in Medicare. [Emphasis added]

While Kessler makes a strong case that taxpayers and Medicare beneficiaries should embrace premium support, he also makes a strong case that it would cut against the interests of elected officials who profit from their ability “to favor narrow groups of providers.” I can’t imagine that this informs much of the Congressional opposition to premium support in any explicit way. But I wonder if it has had some subtle impact.

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