The case for reforming competitive bidding in Medicare Advantage

A couple leaves the Remote Area Medical (RAM) health clinic at the Wise County Fairgrounds in Wise, Virginia July 24, 2009. The free clinic, which lasts 2 1/2 days, is the largest of its kind in the nation providing medical, dental and vision services from more than 1,400 medical volunteers. For many residents of this Appalachian area, the RAM clinic serves as the only medical care they may receive each year. REUTERS/Shannon Stapleton
Editor's note:

This analysis is part of the USC-Brookings Schaeffer Initiative for Health Policy, which is a partnership between the Center for Health Policy at Brookings and the University of Southern California Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings.


This article originally appeared in Health Affairs on May 10, 2018.

Medicare beneficiaries have the option of receiving health coverage either through traditional Medicare or enrolling in a private Medicare Advantage (MA) health plan, which one-third of beneficiaries now do. Medicare pays MA plans a fixed monthly amount for each enrolled member, and MA plans assume full financial responsibility for providing all Medicare-covered benefits to their enrollees. We outline a proposal to reform the way that these fixed monthly payments to MA plans are determined, replacing the current, overly complex structure with one that would enhance competition, simplify beneficiary choice through standardization, and save an estimated $10 billion annually.

Currently, the fixed monthly amount that an MA plan receives is determined by a complicated set of rules and parameters, under which each MA organization submits a “bid” intended to reflect its estimated price for offering the traditional Medicare benefit package. That bid is then compared to an administratively set payment “benchmark,” which loosely reflects the level of spending for an “average risk” traditional Medicare enrollee in the county, adjusted by a number of factors, such as whether the county has low or high traditional Medicare spending and the plan’s quality rating. Ultimately, payments reflect each plan’s bid, adjusted by the risk scores of its enrollees, plus 50–70 percent of the difference between their bid and this benchmark, known as the rebate. (The minor fraction of plans bidding above the benchmark receive the benchmark plus a premium paid by beneficiaries to cover the shortfall.) Plans are required to use this rebate to enhance the value of MA coverage by reducing premiums, reducing cost sharing for services covered under traditional Medicare, offering additional benefits not covered by traditional Medicare, and increasing payments to providers or some combination of the four.

The original goal of Medicare contracting with private plans was to harness their ability to use care-coordination tools to offer high-quality care, while providing enhanced benefits for beneficiaries and saving money for taxpayers. However, research suggests that the current MA bidding structure does not strongly promote competition, allowing plans to bid above their true costs and to retain rebate dollars instead of fully pass savings through to beneficiaries.

To address these concerns, we propose to reform bidding in Medicare Advantage, replacing the current inefficient structure with one that standardizes most MA insurance products and revises the current contracting process to focus on promoting price competition. Under our proposal, MA plans would continue to provide additional benefits beyond traditional Medicare, but Medicare would pay the same rate to plans operating in the same county, which would be determined according to competitive plan bids, and beneficiary premiums would be reduced or increased for plans with bids below or above that market-level average, respectively. Our proposal differs from “premium support” because it does not affect traditional Medicare (other than modestly lowering Part B premiums due to the projected savings).

Flawed MA Payment Design

The current MA bidding system is plagued by three key issues.

Inefficiently High Plan Bids Due To A Complex, Poor Bidding Structure

The incentive for plans to become more efficient or accept lower mark-ups is diminished by the fact that the government collects 30–50 cents of every dollar by which plans reduce their bids below the local payment benchmark. Indeed, while MA plans are supposed to rebate the remaining difference between their bid and the local benchmark (after the government’s 30–50 percent cut) to enrollees in the form of enhanced benefits or reduced costs, evidence suggests that plans retain a significant share of these dollars as higher profits. Studies estimate that consumers receive only one-eighth to one-half of increases to MA plan payments, leading to excessive profits for insurers and wasteful spending.

Overly Complex Choices Complicate Consumer Decision Making

Current MA plan offerings are difficult for consumers to navigate, leading them to make mistakes in determining which plan best suits their needs. Many markets have a proliferation of MA offerings; in 2018, the average Medicare beneficiary had a choice from among 21 different MA plans offered by six different MA organizations. Previous research has shown that too many choices can lead to suboptimal enrollment decisions in Medicare Advantage and other health insurance markets. In addition to being confusing to beneficiaries, the large number and lack of standardization in benefit offerings also undermine plans’ competitive incentives.

Uneven Subsidization Of MA Enrollees

The ratio of MA payments to traditional Medicare costs varies widely across the country. In areas with high traditional Medicare costs, MA plans are generally paid less than the cost of traditional Medicare, while MA plans in other areas of the nation are paid significantly more than the cost of traditional Medicare. Although stemming from an explicit policy choice to have MA plans offered throughout the country, the amount of taxpayer-subsidized additional benefits and lower premiums available to beneficiaries enrolling in Medicare Advantage is highly uneven depending on where they live.

Reforming MA Bidding To Foster Price Competition And Facilitate Better Decision Making

The key objectives of our MA competitive bidding proposal are to: increase price competition among MA plans by rewarding beneficiaries who choose high-quality, low-cost plans; help beneficiaries make informed choices; and make more efficient use of taxpayer resources. Using the reform framework we outline, the specific proposal we present can be modified to incorporate differing policy preferences for factors such as the value of benefit offerings, the degree of standardization, or the calculation of the average bid.

Defining A Standardized Basic MA Product

We propose standardizing MA plans to facilitate competition based on price and quality by making it easier for consumers to compare prices for the same benefits. Every MA organization would be required to offer a standard benefit plan in any county in which it participates. The standard benefit plan would have an actuarial value equal to 105 percent of traditional Medicare’s benefit plan, including the traditional Medicare benefit package, an annual maximum out-of-pocket limit, and reduced cost-sharing for certain services. Defining the standard MA benefit to have a higher value than traditional Medicare assures that beneficiaries—and not only the government—gain financially from lower costs resulting from the MA program.

Average Of Bids In A County For Standardized MA Plans Would Determine Payment Rates

Under our proposal, each MA organization operating in a county would submit a bid reflecting its actuarial estimate of the cost of providing the standard benefit plan (as well as traditional Medicare) for an average-risk beneficiary. The MA payment rate would then be set at the enrollment-weighted average of bids submitted in the county, as long as this average bid is lower than the current benchmark. Counties where the average bid is higher than the current benchmark would not implement the reformed system.

MA beneficiaries would continue to pay the standard Part B premium. Enrollees in MA plans with higher-than-average bids would pay the difference, and those enrolled in plans with lower-than-average bids would receive the lower price through a discounted premium. Because the premiums are for standardized plans, beneficiaries would see the dollar-for-dollar differences in plan costs, providing strong, clear incentives for beneficiaries to select lower-cost plans. As a result, competing to successfully attract enrollees should lead plans to focus on reducing costs to offer lower premiums, paralleling how bidding works in Part D for Medicare prescription drug plans.

Allowance For Enhanced MA Products

While each MA plan would be required to offer a standard benefit plan, they would also be permitted to offer a standard plus benefit plan and an enhanced benefit plan, which would provide richer benefits. Those benefits could include, for example, lowering the maximum out-of-pocket cap below the level specified in the standard plan, exempting from the Part B deductible a limited number of primary care visits or replacing the 20 percent coinsurance with flat copayments for certain visits. The extra benefits of the standard plus option would be fixed across plans within a county, whereas MA organizations would have more flexibility to offer innovative benefits with enhanced plans. This structure provides the benefits of plan standardization for consumer choice and price competition, while retaining the ability of plans to innovate. Beneficiaries enrolling in either a standard plus or enhanced option would pay a monthly MA premium equal to the full amount of the differential between the option’s cost and the average bid for the standard plan (or receive a rebate if the standard plus or enhanced option is cheaper than the average standard plan bid).

Analysis Of Cost And Impact

Using Centers for Medicare and Medicaid Services data, we estimate that our proposal would save the federal government approximately $10 billion annually and lower beneficiary Part B premiums by $1.4 billion. Our modeling uses 2015 data, reports savings in 2015 dollars, and assumes the policy is fully phased-in. Assuming the new competitive bidding system would cause plans to lower their bids by an average of 5 percent, we estimate that 58 percent of counties nationwide, in which 85 percent of Medicare beneficiaries and 93 percent of MA enrollees live, would convert to the new system.

Importantly, this reform can still significantly reduce federal costs without making beneficiaries worse off on average, especially given how little of the additional payment to MA plans above the cost of providing the traditional Medicare benefit currently appears to be passed through to enrollees in the form of lower costs. While our modeling does not detail the proposal’s net impact on current MA enrollees, the MA benefit enhancement for a standard plan can easily be adjusted to meet one’s desired goals; for example, the required actuarial value enhancement for MA plans could be set higher or lower than the 5 percent described above. In addition, transition provisions could be adopted to smooth changes in the generosity of benefit offerings.

Additional details, as well as results for alternative policy specifications and sensitivity analyses, are available in our full white paper.


Converting Medicare Advantage to a competitive bidding system offers an opportunity to make the program more efficient and produce significant federal budgetary savings, potentially without shifting costs (on average) to beneficiaries. Greater program efficiency should be achievable by incentivizing MA organizations to compete on price for a standardized product, instead of competing primarily on benefit generosity, as is largely the case with today’s complex system.

The current structure of Medicare Advantage provides an uneven and inefficient subsidy to Medicare beneficiaries based upon where they reside and how much traditional Medicare costs in that county compared to private plan costs. Much of the additional federal payment to MA plans above the cost of providing the traditional Medicare benefit appears not to flow through to beneficiaries.

Our proposal, by establishing the MA standard plan benefit 5 percent higher than that of traditional Medicare’s plan benefit, provides beneficiaries with a much more uniform benefit across the country. Beneficiaries would maintain access to a private plan with greater benefits than traditional Medicare for the same cost as traditional Medicare. Applying competitive bidding to Medicare Advantage as proposed, however, also guarantees that the federal government gets to share in the savings private plans are able to generate. In doing so, Medicare Advantage would promote cost-effective health care and informed plan choice for Medicare beneficiaries.

Erin Trish is a consultant to a capital management firm on issues related to health care. Outside of this affiliation, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.