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Killing Me Softly: Medicare’s Competitive Bidding Program, and why you should be concerned about it
Various | 2/27/2013 | Michael Bugg

Posted on 02/27/2013 11:13:55 AM PST by Buggman

Those of you outside the medical services industry have probably never heard the phrases “DME” (Durable Medical Equipment) or the more formal DMEPOS (Durable Medical Equipment, Prosthetics, Orthotics and Supplies). You’ve also probably never heard of Medicare’s DMEPOS Competitive Bidding program, and now that I’ve said it, your first thought is probably, “Hey, bringing competition to the medical marketplace! That sounds like a great idea! After all, competition brings down prices while improving service, right? So who could be opposed to that?”

Well, a lot of us, actually. Not because we’re evil monopolists bent on holding onto our little fiefdoms at the taxpayer’s expense. We’re opposed because competitive bidding isn’t competitive. It’s coercive government strong-arming.

Let me lay my personal cards on the table: I’m a registered Republican, with a strongly conservative, almost libertarian, political ideology. I am not big on Federal handouts of any sort, and I believe that Social Security and Medicare were mistakes that are not sustainable in the long run. In fact, they’re close to broke already, thanks to the aging of the American population combined with the decrease in live births (to provide the necessary future workforce) and a Congress that has grossly mismanaged them. I understand completely why Medicare is so desperate to cut expenses: It’s already pretty close to broke.

So why the heck am I arguing against Competitive Bidding? Is it just that I happen to work in this industry and I’m concerned about my own paycheck? Admittedly, yes, I do have a motive there, but it’s not my whole motive. The fact is, regardless of whatever “might have beens” I might imagine, whatever alternate histories I’d like to envision where the United States Federal government had not taken upon itself the socialization of retirement benefits, Medicare is here, it has been for several generations, and a lot of people depend on it. And having taken upon itself to provide for the health care of the elderly, the government owes it to them to enable them to receive quality care—which they cannot do if the providers are driven out of business!

And that’s exactly what is happening with Competitive Bidding.

The company I work for specializes in providing oxygen and other respiratory equipment. While certain devices, like oxygen concentrators, can and usually do run smoothly for years at a time with minimal maintenance, the fact is they still need maintenance. It’s also a fact that a concentrator is not exactly portable, so we also provide lightweight, portable liquid oxygen units which allow our clients to get out and about. These have to be recharged as well as maintained. Many of you have grandparents or even great-grandparents who rely on companies like us for their health and quality of life. Tell me: If suddenly two-thirds of the companies who provide oxygen are suddenly cut off from receiving Medicare (likely going out of business in the process) and those which remain are reduced to such a shoe-string budget that they cannot hire the therapists, technicians, and drivers to handle the suddenly increased demand, how are they going to be able to rush out a replacement concentrator to your grandmother when the one she has breaks down? And how long can she go without that oxygen?

What is Competitive Bidding?
The supposed idea behind Competitive Bidding is that all of the providers in a given area would have to bid for the opportunity to continue to accept Medicare payments. So let’s say for example that a company which is used to receiving $150 a month to provide that oxygen decides that the bare minimum that it can accept to stay in the black is $90. They might bid $110 to give themselves a little margin.

There are just a few little problems:

1. The bids being made were non-binding. That means that another company might choose to bid $60/month, even knowing that they could never sustain their business at that price, just to see what happens when many of the other companies are dropped from the field—basically, to try to “game” the system, counting on more realistic bids by other companies to bring the price back up. As Science News notes:

As a bidder in this system, the rational thing to do is to bid really, really low. After all, your bid doesn’t determine what you’ll be paid, and since 10,000 suppliers might participate, one lowball bid will barely change the median price. If the price turns out to be profitable, you take the contract, and if not, you can just bow out. Of course, if everyone does this the price will collapse and no one will make the equipment.

2. Even knowing this, Medicare still counts the bids made by companies that later backed out in its calculations. See, the idea is that Medicare would take all of these bids and come up with a median price that would, in theory, be fair to all of the winning bidders. The gaming of the system lowers that median price dramatically—and in this case, the government has absolutely zero incentive to crack down, or even correct its numbers once it become evident just how many of the bids were phony.

3. Moreover, Medicare gets to assign a capacity (quantity to be provided) to each bidder, which enables them to further drive down the alleged median price by giving more capacity to the lower bids—whether or not those bids were real!

4. Medicare has steadfastly refused to reveal its arbitrarily assigned capacities (and darn little about how they determined patient demand) or the financial standards they used to determine whether a provider was even qualified to bid. Peter Cramton of the University of Maryland writes,

It was not the bidders who set the prices, but CMS through its arbitrary manipulation of the quantities associated with each bidder. CMS was able to pick any price between the lowest bid made by any bidder and the highest bid made by any bidder through its selection of quantities. The CMS-set quantities are never revealed and never used for anything but setting the price. This is why the CMS process is not an auction at all, but an arbitrary pricing process.

The Results of a Phony “Auction”
The end result is that the honest provider who offered a bid of $110 might lose the bid entirely thanks to low-balling by less-honest companies. Even if he “wins,” Medicare can arbitrarily assign him a much lower price than what he bid--45% lower than current pricing (73% lower for certain mail-order programs, which are common for diabetes supplies), which is a suicide rate. “’There's no one I'm aware of who's making more than 45% margins on their business,’ said Wayne Stanfield, president and CEO of NAIMES.”

That isn’t bidding. It’s not competitive. It’s Medicare hiding behind a false name and false numbers and arbitrarily assigning prices far too low to sustain the Home Medical Equipment industry. Cramton says, “I have never seen a poorer auction or poorer government auction … in my 20 years in this business.”

One thing is certain: these are not competitive prices set by the competitive bids of suppliers. And there is no basis to believe that the set of “winning” suppliers includes those who can supply quality goods and services at least cost. Both the prices and the set of winners were arbitrarily set by CMS without any explanation. On this all experts agree. It is difficult to imagine a more flawed process.

And the results have already been devastating: After Round 1 of the “bidding” process began, more than 450 suppliers were either forced out of business or laid off staff in just the nine areas of the country that were affected. In areas affected by Round 2 of the bidding, more than 75 percent of the patients will have to find a new supplier, often in another state. Those providers which remain will be forced to operate at such a reduced income that they simply will not be able to provide an acceptable standard of care for the numbers of new patients—assuming that the reimbursement that they are being forced to accept even allows them to stay in business!

"’These are suicide rates,’ said John Gallagher, vice president of government affairs at VGM. ‘If they're implemented, I don't see more sales and acquisitions—I see complete collapse.’" That’s not going to save anyone money: Hospitals will be flooded with cases that could have been avoided with adequate, and far less expensive, home care. We’re already seeing an effect on the patients themselves: “For example . . . diabetes testing products priced at $14 were so low that it drove suppliers to narrow their offering. And some of the products that seniors were accustomed to using were no longer available in that market, such as products made with larger screens or with better lighting for those with poor eyesight.”

It’s Too Late for Band-Aids; We Need Emergency Surgery
Competitive Bidding needs to be scrapped—immediately, before more providers go under—and replaced. Rep. Nydia Velazquez (D-NY), a ranking member of the House Small Business Committee, has already introduced H.R.27, the Small Supplier Fairness in Bidding Competition Act of 2013, which would repeal the current Medicare competitive bidding program and terminate the contracts that have already been awarded. In turn, Rep. Tom Price (R-GA), a licensed physician and past chairman of the Republican Study Committee, introduced legislation in the previous Congress to establish the Market Pricing Program (MPP). The MPP would establish bidding regions that are smaller and more homogeneous, as well as making the bid prices an actual clearing price for those areas, instead of a median price of other (often falsely placed) winning bids.

Clearly, this is not a partisan issue, with 173 members of both parties of Congress cosponsoring H.R. 1041: Fairness in Medicare Bidding Act, and 94 members of both parties cosponsoring H.R. 6490: DMEPOS Market Pricing Program Act. Over two dozen consumer and disability groups have also called for its repeal, as have 244 “economists, computer scientists and engineers with expertise in the theory and practice of auctions” in an open letter to President Obama.

Please, take the time to contact your congressmen and ask them to repeal Medicare’s Competitive Bidding process immediately and replace it with a system that won’t cripple providers. This isn’t just another economic issue: Our parents’ and grandparents’ and childrens’ health is literally at stake.

TOPICS: Business/Economy; Editorial; FReeper Editorial; Government
KEYWORDS: bidding; competitive; healthcare; medicare
It's been a long time since I've posted anything, let alone a personal article, but I've been pretty close to this situation for a while, and it's deteriorating rapidly. I know there's a lot on everyone's plate politically, but this isn't an issue that can be put on the back-burner without a heck of a lot of damage being done. Thanks and God bless.
1 posted on 02/27/2013 11:14:03 AM PST by Buggman
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To: Buggman

Prepare to be flamed by thousands of General Contractors out there who live and die by the bid every day.

2 posted on 02/27/2013 11:45:28 AM PST by Buckeye McFrog
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To: Buggman
Regardless of the issue, regardless of the point of view, one can always rationalize one's own opinions/desires as being "in the public interest".

It's even easier when what I believe to be Good For Society At Large also puts money in my own pocket. That's one of the most powerful feedback loops known to exist.

3 posted on 02/27/2013 11:52:30 AM PST by Notary Sojac (Ut veniant omnes)
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To: Buggman

I hate non binding bids.

Dishonest FK’s win and then submit change orders or “correct” their bid to match “ today’s realities”.

They cost jobs, waste time and game the system.

4 posted on 02/27/2013 12:09:00 PM PST by Vendome (Don't take life so seriously, you won't live through it anyway)
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To: Buckeye McFrog

Read the article. If it were an open bidding process where the bid offered was the bid accepted, I wouldn’t be posting this.

5 posted on 02/27/2013 12:09:31 PM PST by Buggman ( - Baruch haBa b'Shem ADONAI!)
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To: Notary Sojac
Like I say just a couple of paragraphs in, Medicare is a mistake. Nevertheless, it exists and we have to deal with it. Right now, they're trying to balance their books with a bit of price manipulation which is putting medical providers out of business--I'm not talking about some vague future, it's already happening.

If someone can figure out a way to get rid of Medicare entirely, fine. Sign me up. But trying to sustain it by bankrupting the medical providers--which is what this is about--is just plain stupid.

6 posted on 02/27/2013 12:12:46 PM PST by Buggman ( - Baruch haBa b'Shem ADONAI!)
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To: Vendome
Agreed. Between that and Medicare's "non-transparent" jiggling with the variables to get an even lower "median" price, it's just government reverse-price-gouging.

I agree that there's a lot of bloat and the health care industry could use some price-correcting competativeness. This is just not the way to do it.

7 posted on 02/27/2013 12:15:52 PM PST by Buggman ( - Baruch haBa b'Shem ADONAI!)
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To: Buggman

It is truly competition but it is competing for the wrong prize.

8 posted on 02/27/2013 7:12:46 PM PST by arthurus (Read Hazlitt's Economics In One Lesson ONLINE
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To: Buggman
This scheme was brokered between the big guys and CMS to drive out competitors from the industry. To streamline it and ration NOS delivered via restricting supply, thus driving down costs. To hell with beneficiaries and their needs. Of course we know some bad apples helped spoil the industry, too.

After nearly 20 years I happily sold out a year and half ago and haven't looked back; your employer should too unless their name is Apria, Lincare, Rotech, AHP, National DME and a few others. They are almost certainly getting inquiries to either merge or a straight buyout. You can linger on but the workload/compliance costs/inherent risks/financial burdens vs net profitability no longer favors continued operations in most cases. Some niche companies are making it for now and some outfits attempting to compete in traditional retail with mixed results. Cash is in short supply for that demo right now. Anyway the old model is over and the fight to reclaim it is over and lost. The sooner you move on the better.

9 posted on 02/27/2013 7:39:50 PM PST by Dysart
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To: Buckeye McFrog

As the old saying goes “if you like government housing you will love government health care”

10 posted on 02/27/2013 8:15:02 PM PST by tongass kid
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To: Dysart
You're correct in your analysis of the whys, but I don't know that it's over yet. There are three bills already introduced into Congress with the intent of killing Comp.Bid., all of which have bipartisan support. Neither party wants to take responsibility for cutting off grandma from her oxygen.

For the record, the company I work for has already won the bid on O2--and not by lowballing our bid--and our numbers show we can hold out on the crust they're tossing us. We've lost the first round on some of the other equipment we sell (like PAPs), but I ran the numbers the other day; the loss to our bottom line on those won't kill us. We'll have to retool our model, but we'll make it.

11 posted on 02/28/2013 7:09:04 AM PST by Buggman ( - Baruch haBa b'Shem ADONAI!)
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To: Buggman

I hope it works out for you.

12 posted on 02/28/2013 11:41:27 AM PST by Dysart
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