The Role of Private Plans in Medicare

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DESCRIPTION (provided by applicant): The purpose of the proposed Program Project is to undertake a fundamental examination of the theoretical and empirical underpinnings of Medicare Part C, or Medicare Advantage (MA) from a framework grounded in economic theory. The Project is organized around five projects that relate to three levels of a multi-stage game: 1) At the lowest level, beneficiaries choose MA or traditional Medicare (TM) depending on plan offerings; 2) At the middle level, plans decide about entry and choose the overall generosity of benefits, depending upon Medicare policy and accounting for beneficiary reaction; 3) Also at the middle level, plans choose the mix or structure of their benefits, depending upon Medicare policy and in light of possible opportunities for efficiencies from integration and incentives due to imperfect risk adjustment, accounting for beneficiary reaction (selection); 4) Also at the middle level, MA plan choices about entry and practice patterns have consequences for beneficiaries in TM and non-Medicare populations; this empirical project focuses on these spillovers; 5) At the highest level, the fifth project is theoretical, focusing on design optimal policies for Medicare given plan and beneficiary reaction, and potential spillovers investigated in the empirical projects. The significance of the proposed research is premised on four observations. First, the Medicare program is of enormous importance to the elderly in the United States, affecting their health, their financial status, and overall welfare. Second, the Medicare program is of broad importance to the federal government because of its budgetary impact. Third, MA, a critical and growing part of Medicare, is arguably failing to achieve its objective of providing high-quality care with greater efficiency than TM. The June 2007 Report to Congress of the Medicare Payment Advisory Commission (MedPAC) flatly concluded: "The current MA payment policy is inconsistent with MedPAC's principles of payment equity between MA and the traditional FFS program." Fourth, a well-designed MA program has the power to move Medicare into a position of leadership in health policy, while a poorly-designed program will stifle attempts at positive reform.