When is Competition Not Competition: The Curious Case of Medicare Advantage

Policymakers routinely assume that Medicare Advantage plans and the traditional Medicare program compete for beneficiaries. Yet the District of Columbia federal district court blocked the proposed Aetna and Humana merger, finding that for purposes of antitrust analysis Medicare Advantage plans and traditional Medicare are effectively in different product markets. That is, they do not compete. This article reviews the basis for the court decision, which relied to a large extent on information that Medicare beneficiaries select their insurance coverage based on durable preferences either for the Medicare Advantage or the traditional Medicare option. The article explores whether the apparently durable beneficiary preferences are based on intrinsically different attributes of Medicare Advantage plans and traditional Medicare or, rather, importantly dependent on regulatory policies that with change would likely alter beneficiaries’ selections. The policies considered include: the maintenance of an archaic benefits structure in traditional Medicare, rules that limit access to supplemental Medigap insurance to wrap-around traditional Medicare, and the relative generosity of payments to Medicare Advantage plans. The article next considers approaches to explicitly promoting competition between the Medicare Advantage sector and traditional Medicare, finding the premium support approach that many market-oriented economists and policy analysts tout as a way to promote efficiency-producing plan competition in Medicare would likely reduce the insurance plan choices available to most beneficiaries. Further, although premium support proponents typically tout the virtues to unfettered market competition, only by adopting regulatory policies that constrain market forces would such an approach actually reduce spending