Background
Medicare Advantage and the Affordable Care Act’s individual marketplaces each rely on managed competition, where regulators specify an insurance product’s benefits and subsidies, while relying on insurers to offer consumers a range of choices at prices reflecting their costs. Commonwealth Fund–supported researchers consider how the structure of government subsidies can produce unintended efficiency problems without adequate competition in these markets.
What the Study Found
The researchers found that the structure of Medicare Advantage can exacerbate the impact of insurers’ market power. In Medicare Advantage markets with insufficient competition, insurers have little incentive to bid below the Medicare benchmark rate (i.e., the maximum payment that Medicare will pay to insurers) even if their actual costs for hospital and physician services are much lower. That’s because any savings from bids below the benchmark are shared with Medicare. The researchers observed that half of all bids by insurers are “bunched” around the benchmark rate.
Separately, the researchers found that when Medicare Advantage increases its benchmark rate, these increases tend to be only partially passed on to consumers in the form of more benefits and lower premiums — another indication that Medicare Advantage markets are not fully competitive.
The researchers found similar issues in the Affordable Care Act’s individual insurance marketplaces. In marketplaces with few participating insurers, pricing can be influenced by the structure of the premium subsidies, which are based on the price of the second-lowest-cost plan in the marketplace’s “silver” tier. In these uncompetitive markets, insurers that anticipate offering one of the two lowest-cost silver plans may raise premiums knowing that any increase will be borne by higher government subsidies and not by consumers.
Conclusions
Without robust competition, the structure of government subsidies in Medicare Advantage and the individual insurance marketplaces can worsen the problem of insurer market power. Policymakers should structure subsidy payments to promote market entry by more insurers, adopt active-purchasing arrangements, redesign payment systems, and adjust the way that prices are presented to Medicare Advantage beneficiaries.