Controversial Seven-State Medicare Bidding Program Set to Expand

Published March 28, 2012

A year after a controversial new procurement system was introduced, many Medicare beneficiaries are facing difficulties or delays as providers are squeezed by dramatically lower prices on lifesaving durable medical equipment and services.

Medicare spends more than $8 billion a year buying durable medical equipment (DME) for the program’s beneficiaries. To reduce the costs borne by taxpayers, the Centers for Medicare and Medicaid Services (CMS) launched the first phase of its competitive bidding program in nine different areas within seven states: Charlotte, Cincinnati, Cleveland, Dallas-Fort Worth, Kansas City, Miami, Orlando, Pittsburgh, and Riverside, California. In January 2013 the program will expand dramatically to reach another 91 regions.

In a competitive bidding auction, DME suppliers in each market bid what they will charge for equipment and services in specified categories. The winner then becomes the Medicare supplier for that market.

According to CMS, a two-week trial in 10 markets in 2007 resulted in a projected savings of 26 percent compared to the Medicare fee schedule. For DME suppliers, however, that amounts to a price cut of 26 percent.

Providers, Beneficiaries Suffer

In the nine regions affected, patients and data show there has been a steep reduction in the number of providers allowed to supply products and services to Medicare patients.

This has resulted in hundreds of seniors and disabled patients struggling to receive the equipment and services they need, according to Michael Reinemer, vice president of communications for the American Association for Homecare, who has been tracking complaints since December 2010.

“We believe in competition and in Medicare paying market prices. Since competitive bidding has been introduced, Medicare has not been competitive. There are hundreds of economists that have roundly criticized the program which has a number of flaws. One of the main problems is that you can walk away from a lowball bid, which is a cardinal sin in the auction business,” he explains.

Small Firms Forced Out

Reinemer reports beneficiaries have complained about needing to travel long distances for prescribed equipment and repairs. Others are unable to find providers in their area that sell or service the equipment the beneficiaries rely on. Some have found their local providers have even gone out of business.

“I don’t know why CMS would want this, but my theory is that they don’t have the resources to manage that many mom and pop providers. As a consequence, many of these mom and pop providers that have been there for generations and know their clients very well are being forced from the market. People are going out of business; they’re laying off their employees, reducing warehouse space,” Reinemer explains.

As low-cost DME equipment is replaced with much more expensive emergency room visits and hospital stays, the cost of Medicare is going up, Reinemer notes.

“Beneficiaries are suffering. They’re finding it hard to get service or their equipment repaired. For something like oxygen, which is supposed to be available 24/7, this can be life or death,” Reinemer added. “What we’re talking about is the care of the frailest people in the country.”

Low Pricing Forces Mergers

John Shirvinsky, executive director of the Pennsylvania Association of Medical Suppliers, says there is no true competitive bidding going on in Pittsburgh.

“Free-market economists are saying you don’t do this to a free market, auction economists are saying you don’t do this to an auction, and all the while, CMS is saying everybody else is wrong,” said Shirvinsky. “What’s happening in Pittsburgh is that all the predictions made by the free-market economists and auction economists are coming true. Overwhelmingly, the Pittsburgh market is populated by mom and pops. They’re doing whatever they can to hold on. In some cases, they are not taking any salary.”

According to Shirvinsky, the market is unsustainable with prices set artificially low, necessitating decreases in quality and service. He notes Peter Cramton, a professor of economics at the University of Maryland, took CMS’s own numbers about market share and found 74 percent of contracts went to companies with no capacity in Pennsylvania.

“These numbers are just nuts! There’s virtually zero price competition in health care, but there is intense competition for service and quality which ultimately benefits the consumer,” Shirvinsky said. “Hands down, we are the cheapest form of health care. For example, oxygen can be provided for only $6 per day in your home; enroll in a hospital and your stay can be several thousand dollars a day. So why would you want to harm this market?”

‘Crazy Government Program’

According to Shirvinsky, the pressure is leading to a rapid increase in mergers as companies struggle to survive.

“I’ve had half a dozen mergers and another half-dozen members say they were thinking about mergers. They’re doing anything they can to survive in this climate,” Shirvinsky added. “This is a very big problem and one that is entirely preventable, since it was all created by this crazy government program.”

‘A Disaster Waiting to Happen’

Brett Katzman, an economics professor at Kennesaw State University, says what the government has created is not true competitive bidding.

“They do have an auction, [and] they collect the bids, but it doesn’t adhere to any of the characteristics you need for a good auction. What they have now is government regulation in sheep’s clothing,” says Katzman.

He says the current approach is an unsustainable model.

“So far, everyone involved with Medicare competitive bidding except CMS realizes this is a disaster waiting to happen. Even people in Congress recognize this is a serious problem. But they all seem to be committed to the current process until it fails miserably,” Katzman said.