Policy Documents

Medicare and Competitive Bidding for Complex Therapeutic Devices

February 9, 2011

In just a few months, Medicare will begin another round of competitive bidding for durable medical equipment. This round will be different from those that have come before. This document explains the competitive bidding process, how it works within Medicare, and some problematic (perhaps deadly) flaws in the current system.

What is competitive bidding?

Competitive bidding is a process used to contract with suppliers for the best price and contract terms. Although it’s possible for any person or institution to take competitive bids for almost anything, it’s largely used by larger institutions and the government.

Most government contracts—for everything from fighter aircraft to road construction projects—are competitively bid. The government agency that wants to buy something establishes criteria for what it wants to buy and then, typically, buys from the bidder or group of bidders that submits the lowest bid and can show an ability to deliver the product. Essentially, competitive bidding is a “reverse auction” in which the person who submits the low bid wins the right to sell something to the government.

Does Medicare use competitive bidding?

Yes. Medicare, the federally funded health coverage program for elderly and disabled Americans, has used competitive bidding—in a limited way—for more than a decade. The most important Medicare competitive bidding process involves a category of products called durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS). This category includes a pretty broad range of devices used (mostly, although not entirely) outside of hospitals to help treat patients. It includes everything from simple walkers to complex rehabilitative power wheelchairs.

How does Medicare’s competitive bidding process work?

Frankly, it’s a mess. A letter signed by dozens of academic auction experts outlines some flaws with the process. The process is different from the process used by nearly every other government agency, private corporation, or other entity. The experts identify four particular problems with the process: bids are not binding commitments (as they are in other auctions); a unique “median pricing” rule ensures that some suppliers will be allowed to sell to the government only at prices below their actual bids (no other auction works this way); the same rules give suppliers large incentives not to bid their actual costs; and the bidding process lacks transparency (among other problems, quality standards and performance objectives are not clear