Thought to be the antidote to Medicare's fiscal ills, competitive pricing among Medicare health plans is once again on hold as a national council overseeing two pilot projects tries to figure out how to get out of the starting gate.
The council has come to a preliminary but contradictory conclusion: To show that competitive pricing will save money, Medicare will have to pay more to plans participating in the demonstrations.
If the demonstrations by definition must automatically lead to reduced reimbursement, as is now the case, the council fears that no health plan will want to participate. If the council wants to test the mechanics of Medicare competitive bidding, it believes it may have to at least make sure providers maintain current reimbursement levels.
Field tests in Kansas City, Mo., and Phoenix have ground to a halt by a combination of local, "not-in-my-backyard" politics and the intervention of members of Congress.
Originally authorized under the Balanced Budget Act of 1997, the demonstration projects were delayed at least until 2002 under the provisions of the Balanced Budget Refinement Act of 1999.
The 1999 law required that the Competitive Pricing Advisory Committee, which is overseeing the projects, report to Congress on how to incorporate the Medicare fee-for-service system into the bidding process and how to structure the benefits.
False starts are nothing new for the competitive-pricing project (See chart). Earlier proposals in Baltimore and Denver were brought down by the same combination of local and national politics driven by the resistance of the provider and plan communities.
"Everybody wants to learn a better way to price Medicare products, but nobody wants to be the experimental site," says Jim Cubbin, chairman of the Competitive Pricing Advisory Committee, which HCFA appointed.
"We had a congressional mandate to do it, and we still couldn't do it," says Cubbin, who also is executive director of healthcare at General Motors Corp.
Competitive pricing is seen by many lawmakers and policy experts, particularly moderate and conservative ones, as the answer to solvency and efficiency challenges to be faced by Medicare as the baby boom generation begins retiring in 2010.
But without field tests, making a competitively priced Medicare system will be guesswork, Cubbin says.
"We'll probably end up with Medicare reform based on somebody's best judgment of what might work . . . without having an opportunity to test some of these concepts," he says.
That doesn't necessarily bother Sen. John Breaux (D-La.), an author of Medicare-reform legislation that embraces competitive pricing.
"Most things we do in Congress aren't the subject of field-testing," Breaux says. He says the local politics of imposing a demonstration project will make it virtually impossible to test. "Every time (you propose a pilot), somebody says, `Don't do it here.' "
Others view the test as important.
"You can't slam this thing together nationwide," says Joseph Anderson, a healthcare consultant who chaired the Phoenix Local Area Advisory Committee. "You need time for people to learn how to run a competitive program."
The national committee selected Phoenix from five markets with high HMO penetration and Kansas City from five markets with low HMO penetration. Kansas City had about 34,000 Medicare beneficiaries enrolled in managed care in 1997, and Phoenix had almost 142,000 beneficiaries in HMOs in 1996, according to the National Institute for Health Care Management's Health Care System Datasource.
The current Medicare payment formula sets HMOs' capitation rate on a schedule that is based on average local per-beneficiary fee-for-service rates.
But under the national advisory committee's framework for the demonstration projects, health plans would have to bid to cover a standard benefit package for beneficiaries in the Phoenix and Kansas City metropolitan areas. The government's contribution would be based on an average of the plans' bids. Plans with higher-than-average bids would have charged a premium to enrollees, and plans with lower-than-average bids would have been able to offer additional benefits or pocket the difference.
But because the budget law required that the projects be "budget neutral"--that is, not spend any more Medicare revenue to cover the beneficiaries in those two areas than it already does--it generated resistance among plans and providers alike, according to many experts and participants in the local debates.
"The signal that sends upfront is that this is a scheme to squeeze providers and beneficiaries," says John Rivers, president and chief executive officer of the Arizona Hospital and Healthcare Association.
That was especially true because the projects were taking shape just as hospitals and other providers began to blame the payment restraints in the budget law for their emerging financial woes, and Medicare+Choice plans were beginning to desert some regions because they viewed them as unprofitable.
That has led to the conclusion that the projects should not be budget neutral. Sen. Jon Kyl (R-Ariz.), who intervened in the projects, has made such a case to the national advisory council.
Furthermore, managed-care plans objected that the fee-for-service system also needs to be part of the competition. One way it could be is to incorporate the per-beneficiary costs for treating seniors in the area into the mathematical calculation that yields the government's capitation rate.