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JAMA Forum Archive, 2012-2019: Health policy commentary from leaders in the field
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How Medicare Solves Private Plans’ Problems and Vice Versa

For some reason, when it comes to health insurance, most people seem to think either private plans in competition are best or a government option, like Medicare, is preferable. Few seem to recognize the benefits of the coexistence of private and public alternatives. In fact, each plan type can help the other perform better than it would have if it were the only option.

Austin Frakt, PhD

In a new article in the Annual Review of Economics, Katherine Baicker, Amitabh Chandra, and Jon Skinner point out some of the ways Medicare has helped solve a coordination problem among private plans.

It is natural to ask why private providers have not adopted ACOs [Accountable Care Organizations, groups that give coordinated health care and for whom payment is tied to achieving health care quality outcomes and goals that can lead to cost savings] or more bundled payments on their own. This remains a puzzle. One explanation is that it is a coordination problem—all insurers may want to adopt larger bundled payments, but no single insurer can make the transition. This is certainly consistent with the historical record on the adoption of prospective payment for hospital care. Once it was introduced in Medicare, private plans were quick to adopt it. Similarly, private hospitals were quick to use the federal government’s efforts to measure quality of care even though nothing stopped them from forming consortiums to measure quality before these federal efforts.

(The authors make many other excellent points. The paper is worth a full read.)

Their points are generally valid in that it’s common for private plans to adopt certain types of payment reforms and quality monitoring after these measures are introduced in Medicare but not before. Nevertheless, there are some examples of ACO-like contracts made by private plans ahead of the Medicare counterparts. And that doesn’t count the failed attempts at capitation (establishing a dollar amount to cover the cost of health care services provided for an individual during a specified length of time) by private insurers and provider groups in the 1990s. I don’t think this invalidates the general point the authors make. It seems Medicare has solved a coordination problem among private insurers.

Indeed, some of the things Medicare will do are properly viewed as public goods. All but a handful of large, dominant health plans cannot convince large hospital systems to accept a new form of payment system. But Medicare can. What health plan will do its own comparative effectiveness analysis to determine which interventions work best for managing a condition? Medicare will or could. The results of both of these types of innovations, and others, will be public information and can benefit all plans and all consumers.

History shows that Medicare has done some things private plans seem unable to do, and then private plans voluntarily copy Medicare. But it goes the other way too.

For example, private plans have innovated in ways that traditional Medicare has not. Managed care, consumer-directed health plans, prescription drug benefits, and catastrophic coverage all exist or existed in the commercial market before adoption by Medicare (if ever). In some cases, the Medicare program, though not the traditional fee-for-service arm of Medicare itself, followed private plans’ lead, adding managed care plans (Medicare Advantage) and a prescription drug benefit (Part D), for example.

There does seem to be a coordination problem among private plans that Medicare solves. Likewise, the private sector sometimes does a better job of designing health plan options. That both plan types, private and government, play a worthwhile role needn’t be shocking or blasphemous. The fact that they both play worthwhile roles ought to be widely acknowledged. Naturally, it often isn’t—least of all, it seems, in our politically charged health policy debates.

About the author: Austin B. Frakt, PhD, is a health economist and an assistant professor at Boston University’s School of Medicine and School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of Boston University.
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