As a natural outcome of program incentives, physicians and other health care providers are motivated to deliver more services as a means to increase Medicare fee-for-service (FFS) payments. Chronic overtreatment, and the resulting overpayment, has led Medicare into its current financial crisis.

Medicare’s private insurance plans, Medicare Advantage (MA) plans, offer a fixed-cost payment to cover the monthly care of those seniors enrolled. As a result, care providers are incentivized to minimize ineffective and costly services. While Medicare Advantage plans are more cost-efficient than the former in some areas, the opposite holds true in others.

Research conducted by the American Enterprise Institute for Public Policy Research in their seven-page report published in February of 2012, Competitive Bidding Can Help Solve Medicare’s Fiscal Crisis, concludes that competitive bidding, a key feature of the bipartisan Wyden-Ryan reform proposal, could significantly reduce cost and elevate value.

In a competitive bidding scenario, both Medicare FFS and Medicare Advantage plans would submit bids for standard benefits offered in each market area. Government payment would be established at a rate equal to each area’s lowest or second lowest bid. An adjustment would be made to account for enrollee health risk within each plan. Out-of-pocket premiums would then be mandated for beneficiaries who opt to enroll in a high-bid plan, while low-bidders would enjoy increased enrollment.

This report concluded that:

  1. The cost savings attainable through competitive bidding could solve Medicare’s financial crisis.
  2. Medicare could save as much as $339 billion over the course of 10 years, keeping premiums stable for most seniors and avoiding tax increases.
  3. While 33 percent of beneficiaries could see a $40 monthly increase in payments, this could be avoided by switching to a more competitively priced plan.
  4. Buffering strategies could be used to minimize the impact of abrupt payment changes and to assist with affordability for low-income beneficiaries.

To read or download the full brief, click here (PDF).