Project 5 – Improving the Design of Medicare Advantage

Thomas G. McGuire, PhD, principal investigator

This project applies methodologies from the “mechanism design” literature, broadly construed, to policy decision for Medicare Advantage
(MA). Medicare decides about the level of plan payment, regulation of the form of plans, benefits plans must provide, premiums that can be
charged, conditions of plan entry and bidding, rules for beneficiary enrollment, and mandatory reports on quality and consumer satisfaction,
among other policies. These choices affect overall Medicare costs and beneficiary welfare. Medicare may also impose spillover effects on the
entire U.S. health care system.  Rigorous analysis of Medicare policy
choices can improve our scientific understanding of the effects of these
policies, and ultimately lead to policy improvements. Mechanism design
analysis is powerful and flexible, capable of working with nonstandard
objective functions (e.g., including outcomes other than profits in the
objective function), as well as with a range of market structures and
information imperfections.  The mechanism design methodology has guided
the design of health insurance coverage and health care payment
policies.  The specific Aims of this project are:

Aim 1
Study whether and how Medicare should play a more active
role in regulating entry, determining the number of MA plans that will
function in a market, and establishing the degree and dimensions of
competition among these plans. Taking the perspective from industrial
organization that Medicare is in a vertical relationship with MA
plans, we will draw analogies from concepts of Entry Management,
Exclusive Territories, Retail Price Maintenance and Option Contracts to
derive implications for Medicare regulatory policy. We expect to study
regulatory policies for Medicare that rely not only on verifiable
characteristics of plans, but also on their observable (but not
verifiable) characteristics.

Aim 2
Characterize the optimal payment to private plans in
Medicare, including issues related to setting the premium paid by
beneficiaries, the level of the benchmark payment, and risk adjustment
of the benchmark payment.  Characterize the combination of policies that
have the potential to maximize social welfare, giving varying weights
to total program costs. This analysis will incorporate consideration of
efficiencies from integration in MA plans possible and possible
spillovers from MA plans to traditional Medicare (TM) and private
payers.

Aim 3
Study the potential for quality reporting to improve
outcomes, including the positive and negative effects of commonly used
quality reporting mechanisms, such as the Global Weighted Report and the
Binary Report, on plans’ incentives to provide the socially efficient
quality of care. Incorporate the goal of sorting beneficiaries
efficiently among MA plans and TM, and analyze the tradeoff between
efficient incentives to plans and information enable beneficiary choice.
Compare and rank widely used quality reporting mechanisms. Derive
implications for the optimal design of quality reports in the MA market.