Reforming Medicare’s Competitive Bidding Program To Improve Health And Lower Costs – Pacific Research Institute

Reforming Medicare’s Competitive Bidding Program To Improve Health And Lower Costs

Through its purchases of durable medical equipment (DME), the Centers for Medicare & Medicaid Services’ (CMS) helps many patients remain in their home and out of hospitals or other long-term care settings. These purchases cover a wide array of medical equipment including diabetes testing strips, wheelchairs, and oxygen tanks.

Previously, CMS maintained a set fee schedule to compensate medical equipment suppliers, but this system was widely panned. The critics, including the General Accounting Office (GAO) and the Inspector General of the Department of Health and Human Services, noted that the reimbursement system was wasteful, outdated, and lacked a logical foundation.

In response to these problems, CMS implemented the right reform by creating a competitive bidding process for suppliers. Unfortunately, CMS used an illogical bidding program that created a new set of problems.

Recognizing its past error, CMS is considering a regulatory fix to this well-intentioned, but poorly executed, program that would address many of the systems’ current problems.

On a positive note, the current competitive bidding program has reduced total DME spending due to the requirement that all submitted bids must be less than the prices on the existing fee schedules. But, the savings are not sustainable and the quality of DME products that patients are receiving is declining.

The crux of the problem is the methodology that CMS uses to calculate the winning bid. Instead of using one of the typical methods for establishing a winning bid, CMS sets the winning bid equal to the median (or average) price of all of the winning bidders.

Speaking about this unusual program, auction theory expert Peter Cramton said it was “a never before seen” bidding process. The bidding program also makes little sense and creates several adverse incentives that ultimately impose unnecessary costs on patients, Medicare, and DME vendors.

From a patient perspective, the current bidding process biases winning bids toward lower cost and lower quality medical equipment. Often, these supplies are inappropriate and, therefore, reduce patients’ quality of care.

For example, the competitive bidding program reduces the availability of home oxygen supplies causing many patients with severe lung diseases to only have access to large compressed oxygen tanks. For many patients, these tanks are medically inferior to the liquid oxygen tanks that they should be receiving. Lack of access to the appropriate oxygen therapy is essential for patients, particularly newly-diagnosed COPD patients whose total health care costs are 20% lower when they receive the appropriate oxygen therapy within two months of diagnosis.

It is not just home oxygen therapy impacted by these disincentives either. Access to the right testing systems and supplies is essential for effective self-management of diabetes. Unfortunately, the competitive bidding program is limiting this access. Since the current competitive bidding program is reducing choices and access to the appropriate diabetes testing supplies, many patients are facing decreased health outcomes.

Over time, these access problems will raise overall health care costs that will overwhelm the savings created by the current competitive bidding process.

Another problem with the current competitive bidding process is that it incents vendors to submit uneconomical bids. Remember, vendors’ compensation is not based on the bid they submitted – winning bidders are compensated based on the average of the winning bids. This means that vendors do not bear all of the costs from submitting bids with uneconomical prices, but they do receive all of the benefits – submitting a low bid increases a vendor’s chances of winning.

By incenting uneconomical bids, the current competitive bidding program destabilizes the market leading to the aforementioned availability and quality problems. Worsening these disincentives, potential vendors are also incented to intentionally underbid the economically viable price in order to reduce the profitability of their competitors. These types of games only further destabilize the vendor market while harming patient well-being.

These problems are now unnecessarily jeopardizing the long-term sustainability of the DME market. Fortunately, CMS appears to have recognized that the system requires reform.

In July 2018, CMS released a Proposed Rule that addresses many of the problems with the competitive bidding program; most importantly, it replaces the current median price compensation practice with a winning bid that is consistent with a market-clearing price. This rule is currently open for public comment and is expected to be finalized in mid-November 2018.

CMS should implement this bidding process based on a market-clearing price as standard bidding theory would suggest. Under such a system, bidders would be encouraged to submit realistic bids and will be discouraged from cheating.

Consequently, the competitive bidding process would ensure that there would be adequate supplies for patients, while minimizing Medicare’s costs and ensuring suppliers received adequate compensation. A win-win-win process that is sustainable over the long-term.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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