In 2003 legislation required Medicare to begin a competitive bidding program for durable medical equipment.  Later legislation delayed implementation until 2009.  To support the original requirement in 2005 the Centers for Medicare and Medicaid Services ( CMS) began a study named Evaluation of National DMEPOS Competitive Bidding Program .  The results of all research activities as of Fall 2010 will be included in a Report to Congress, slated for release in mid-2011. 


In advance of the research report, in a Feb 2011 press release CMS said its competitive bidding program will obtain durable medical equipment and supplies for 32% less.  That could be significant since Durable medical equipment cost the nation $35 billion in 2009 .  If Legislators think they might extend Medicare savings to patients beyond Medicare, they’d be talking about $100+ billion savings over 10 years, but not so fast…


CMS’s press release did not mention disturbing aspects of its quirky auction bidding process .  CMS collects bids on price and quantity for each item type.  When all bids are in, CMS picks the median price as “the winning price.”  That is where the problem starts.


In a normal auction, a winning price is set by ranking bids by price and identifying the lowest price at which the total quantity you need is offered – that becomes the winning price, is available to all winning bidders, but winning bidders are not allowed to withdraw.   CMS’s process allows winning bidders to withdraw ! CMS’s bidders make low-ball bids hoping the median price will be something they can tolerate.  If it’s not tolerable, they just withdraw.  If a lot withdraw, there’s not enough quantity at the “winning” price.


CMS’s bidding process can produce photogenic prices (32% lower?), without assurance there is enough supply at that price.   When durable medical equipment that enables homecare is in short supply, it results in longer hospital stays and more emergency room visits.  Hospital and ER care is far more costly than home care.  The coming report to Congress needs to reveal supply shortfalls due to bidders withdrawing. 


The severe pricing pressure of CMS’s quirky bidding process can also hurt quality.  Unless very finely tuned, bidding processes tend to place products with different functions, features and durability into the same item type, leading to false economies where newer, more effective items don’t make the cutoff at a super-low price.  Where a super-low price is sought by ignoring quality differences, innovation is suppressed.  A recent study estimates CMS’s quirky bidding process costs 500,000 in expected life-years each year or about $50 billion.    


One example of this is Negative Pressure Wound Therapy (NPWT) , a medical device used to heal large wounds via a moist and closed environment.  Its use is more expensive than traditional wound care (typically dressings, such as saline gauze), so its direct cost would look cost-prohibitive against saline gauze.  But, NPWT produces much better healing for patients.  For each $1 of cost it gives $7 in economic benefits compared with traditional dressings (reduced hospital days, fewer amputations, etc…).   CMS’s bidding process needs to capture these huge benefits.  The coming report to Congress should show how CMS’s bidding process includes economic savings that flow from explicitly acknowledging quality differences among products within an item type.


The Affordable Care Act (ACA) set government health experts on a pedestal, authorizing them to prescribe the quality and manner of treatments available.  For 128 million Americans in Medicare or Medicaid, CMS is authorized to set the quality requirements and price paid to health providers, including durable medical device suppliers .   CMS’s durable medical device bidding process is also a harbinger of the kind of managed care all Americans can expect as ACA implements.  Early information suggests CMS’s report to Congress on durable medical equipment procurement deserves very careful scrutiny.


Alan Daley is a retired businessman living in Florida.  He follows public policy from the consumer’s perspective.