The effects of market structure and payment rate on the entry of private health plans into the Medicare market

The title of this post is also the title of my recent paper, coauthored by Steve Pizer and Roger Feldman (published version in Inquiry, ungated working paper version).

The aspect of our paper I'll focus on in this post is the effect of the new, lower, ACA payments to Medicare Advantage on private plan participation in Medicare (aka, entry). There are many papers on plan entry into the Medicare market. Ours is different in that it is the first one to: (1) jointly model all three principal plan types (coordinated care plans (CCPs),* private fee for service (PFFS) plans, and stand-alone prescription drug plans (PDPs)) and (2) address plan entry decisions from the perspective of the firm. (A new paper in HSR by Chris Afendulis, Mary Landrum, and Michael Chernew focuses on the effect of ACA payment rates on CCPs.)

Firms face far more than just an enter/don't enter decision. They can independently decide which local markets to enter. In Medicare, this is a county- or, in the case of regional PPOs and PDPs, a region- level decision, though in our paper we make the case that it is effectively county level for all plans. (That's a detail I'm not going to explain in this post.) They can also enter with just one of the three plan types, any two of them, or all three. So, the entry decision space has many dimensions. Our paper captures more of them than any before it.

As you can guess, this is a bit complicated. I'll spare you the math. Suffice it to say that we develop a reduced form, empirical model that captures the competitive effects across firms and the joint entry decisions across plan types within firms. One consequence of our model is that changes in payment rates for Medicare Advantage (MA) plans (CCPs and PFFS plans) affect PDP entry as well even though the latter are not paid MA rates.

This is shown in the chart below, which uses our model to simulate what would have happened to plan entry in 2009 if ACA-like payment rates had been fully in effect. We predict that CCP entry would have declined by 40%, PFFS by almost 30%, and PDP entry would have increased by about 3%. The latter is a spillover effect. When CCPs and PFFS plans, which may offer drug benefits, exit markets, that presents a less competitive environment for PDPs, so they are a bit more likely to enter. If it isn't obvious, I'll say it: the CCP and PFFS effects are huge.

What's simulated here is the effect of some aspects of the ACA payment methodology, as if they were fully phased in by 2009.

The new benchmarks will range from 95% of per beneficiary costs in counties in the top quartile of FFS costs to 115% of per beneficiary costs for counties in the bottom quartile of FFS costs. New plan payments will be capped at old payment rate levels so that the new benchmarks can only lower, not raise, payments. Our simulation of payment rate changes incorporates the aforementioned features of the ACA provisions. We did not simulate other features, like the proportion of benchmark bid differences that plans can retain for below-benchmark bids (currently 75%, this will be reduced to as low as 50%, depending on plan quality measures) and quality-based bonus payments.

Also, because the paper examines joint entry, our sample of firms includes only those that have revealed an interest in offering all three plan types. So, our results are not necessarily generalizable to the entire Medicare private plan market. However, the subset of firms we study serve 89% of all PDP enrollees, 84% of all PFFS enrollees, and half of CCP enrollees.

Bottom line: The ACA payment cuts will, when fully phased in, have a significant impact on the market. However, to the extent they're undone by extra "quality" bonus payments, the reduction in entry we predict may not materialize.

I've blogged about other, technical content of the paper here and here.

* CCPs are mostly HMOs and PPOs. Along with PFFS plans, CCPs are part of Medicare Advantage.

--Austin Frakt