Medicare Advantage (MA) uses a benchmark-and-bidding system to induce private plans to provide Medicare benefits at lower costs than traditional Medicare. This study examines how well the current system encourages MA plans to bid their lowest cost by examining the relationship between costs and benchmarks. We find that a one-dollar increase in benchmarks is associated with 32-cent-higher plan costs and a 52-cent-higher rebate, even when controlling for market and plan factors that can affect costs. This suggests the current benchmark-and-bidding system allows plans to bid higher than local input prices and other market conditions would seem to warrant.
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