President Barack Obama proposes to save $177 billion over 10 years through a new competitive-bidding system for “Medicare Advantage” plans. These are the private health plans that serve nearly one in four Medicare beneficiaries. In 2009 these private plans will receive an average 14 per­cent—or $12 billion— more than the govern­ment would pay if beneficiaries enrolled in those plans had remained in the traditional Medicare program.

The Obama administration’s plan goes beyond other proposals to cut payments to Medicare Ad­vantage plans. (See Health Policy Brief: Medicare Advantage Plans, April 29, 2009, for a fuller de­scription of these plans, how they are currently paid, other proposals to change the payment sys­tem, and arguments for and against doing so.) Under the Obama administration’s proposal, companies in a given geographic area would sub­mit bids to cover Medicare beneficiaries, as they do now. But they would then be paid the average of their bids, plus some additional amounts as de­tailed below. Insurers submitting below-average bids would receive the average payment; they could use the difference between their bids and the average payment amount to provide addition­al benefits to enrollees. Companies with above-average bids would charge members a premium to make up the shortfall between the average pay­ment and their bids.