Poorly Designed Medicare Auctions Could Disrupt Device Marketplace

Published November 8, 2011

Auctions for contracts to sell durable medical equipment under Medicare may have design flaws that will lead to prices too low for market stability, some consumer advocates warn. They say this likely result will be shortages in supply to patients, higher costs to government and society, and lower quality of care.

The auctions are set up so that bidders are not held to their bids, and the winner of the auction will be the median bid, rather than the lowest. Steve Pociask, president of the American Consumer Institute Center for Citizen Research says this is a serious flaw and the Centers for Medicare and Medicaid Services (CMS) have created something that is “not a competitive process at all.”

“They’ve put in some irrational rules that will never find the right market price, and the result of that is you will never have the correct supply,” said Pociask. “In fact, the incentives are for lowball bidding. What that will do is create shortages, in effect a low supply, which will effectively limit patient access to these medical supplies.

“So we have these unintended consequences where Congress sets out to reduce costs for home care and the end result is we’re just going to push even higher costs over to hospitals,” he added. As a result, Pociask says, “We’re going to get shortages, higher costs, and worse outcomes for patients.”

‘Nobody Appears to Care’

Benjamin Zycher, a senior fellow at the Pacific Research Institute, agrees the competitive bidding process used in this case is an ill-conceived method of saving costs.

“Government, as an interest group, has incentives to drive down budget outlays and ignore costs that don’t show up in the budget. So keeping the system of using the median among the competing price bids, and not treating the bids as binding commitments or contracts, has the effect of biasing prices downward, below the level needed to support the business,” Zycher said.

Pociask notes multiple letters on the topic have been sent to the CMS, to Congress, and to President Obama.

“In one case, 244 professors, economists, and auction experts signed a letter to President Obama saying, ‘Look, this is a disaster. No one is paying attention to this.’ There were four Nobel laureates who signed that as well, and we haven’t heard anything back on this,” Pociask said. “Nobody appears to care. It’s a bureaucracy out of control.”

Taxpayer Dollar Shell Games

As an example of the shell game the auction process allows, Pociask points to a device used to perform Negative Pressure Wound Therapy.

“Every dollar that is spent on this product saves seven dollars,” Pociask said. “The effect of taking this away [from] home use—and that is what is going to happen—is going to save one dollar for Medicare. But it’s going to push seven dollars toward hospital care. That’s the kind of insanity that’s going on.”

Grace-Marie Turner, president of the Galen Institute, said HHS could have learned from other government agencies the right way to run a competitive bidding program.

“Instead of looking at other agencies, they have designed a program that is highly flawed and will lead to supply shortages and lack of proper service support for equipment, such as Negative Pressure Wound Therapy,” Turner said. “Used properly, this device can save limbs and even lives and can be used at home if there is service support. But the new competitive bidding program disregards the essential need to build in proper payment for this support and will likely lead to worse health outcomes, more hospitalizations, and higher costs.”

Increases Overall Costs

Zycher notes these policies result in unnecessary costs passed on to taxpayers.

“It results in outlays lower than would otherwise be the case,” Zycher said, “even though the true cost to society is much higher. And with respect to investment effects, lower prices automatically translate to lower returns in a world in which, as an economist would put it, demand is inelastic.”

Pociask agrees, saying, “Whenever you set a price below the equilibrium level, you will always have shortages.

“What happens at the end,” added Pociask, “is that it encourages the lowball bids to stay alive.” The rules don’t work with normal bidding, he continued, “and the result is going to be an artificially low price.”

“HHS needs to go back to the drawing board in designing this program,” Turner advised.