Regulatory Bid-Rigging Will Cost Medicare Patients Dearly

What if regulations prevented your doctor from prescribing you the correct course of treatment for your illness? That is exactly what will be happening, as the Centers for Medicare and Medicaid (CMS) moves ahead to implement a seriously flawed medical device auction program. That program, if not fixed, would reduce patient access to prescribed medical supplies for home use, as well as worsen patient outcomes and increase medical costs.

Nearly a decade ago, Congress introduced legislation that would setup an auction bidding system as a means to drive down Medicare costs for home medical equipment – including crutches, wheelchairs, oxygen, diabetes testing equipment and other durable supplies. Auctions can certainly be a very effective way to achieve competitive prices, if done correctly. In reviewing the legislation, the Congressional Budget Office (CBO) estimated that a competitive bidding system would result in billions of dollars of savings, providing Congress the impetus to pass this legislation into law. Following years of delay, the CMS is now aggressively implementing an auction system, but it is not a competitive system, as Congress had intended. Actually, if CBO were to re-score the legislation given the proposed rules, it is likely that the proposed auction system would raise medical costs in the economy, not lower them. In fact, at a University of Maryland auction conference, CBOs’ Chief of Medicare Cost Estimates Unit, Tom Bradley, referred to the CMS and its faulty bidding mechanism by saying, “if they don’t change the mechanism they use, I think there is a high probability of failure in the near future,” and added “there is near certainty of failure sometime down the road.”

The problem is that the auction system has major flaws that will not produce a competitive market price. One flaw is that the winning price will be determined not by the lowest bids but by the median price of the bidders. That odd auction rule encourages bidders to underbid in order to remain longer in auction rounds, and it means that bids may not aligned with supplier costs.

A second flaw in the program allows the winning bids to be nonbinding. In other words, if suppliers underbid, they can just walk away from the auction and refuse to supply the product at the winning price. The combination of these two flaws encourages low-ball bidding that will produce artificially low prices. If prices are too low, there will be supply shortages, as well as fewer suppliers, thus limiting Medicare patient access to these medical supplies. As medical equipment shortages develop, patients are more likely to have complications and be readmitted into hospitals — forcing homebound patients into more costly hospital care. As a result, while the CMS can reduce its direct budget on medical home equipment by limiting supply to patients, the cost of medical care in the total economy will increase. This is a really bad tradeoff for patients and its simply regulatory malpractice.

Counter to the spirit of transparency and open discourse, the CMS waited to the close of business of last Friday to announce its nationwide expansion of the auction system, adding auctions in 91 metropolitan areas, as well as an expansion of product categories. The metro areas include San Francisco, New York City, Los Angeles, San Antonio, Jacksonville, Washington- DC, San Diego, Houston and many other areas. The announcement predicted billions of dollars of savings from the program.

Unfortunately, the savings that the auction system was supposed to bring will never materialize, according to numerous empirical studies. A comparison of auction simulations conducted separately by researchers at the University of Maryland and Cal Tech show that the CMS program will not produce the correct market price or adequate supply. Another study by VGM Group estimated that the CMS bidding system would lead to 100,000 fewer jobs, as 42% of suppliers go out of business. Economist Benjamin Zycher of the Pacific Research Institute estimated that the chill in innovation and investment, as a result of the CMS program, would cost the US economy $500 billion and impose a loss of about 5 million life-years. An American Consumer Institute report found that these regulatory rules would lead to $6 billion increase in medical costs by just limiting patient access to just one product — negative pressure wound therapy — leading to increased patient reinfections, amputations, hospitalization and prosthetics. These studies show that the costs of the new program would significantly outweigh the benefits.

These flaws were also pointed out last year in a letter to CMS and Congress signed by 167 economists and auction experts led by Professor Peter Cramton of the University of Maryland, but the CMS seems to have ignored these concerns. Just last June, 244 economists and auction experts, including four Nobel Laureates, sent a letter to President Obama asking him to stop the imposition of these costly regulations, but the CMS just keeps moving ahead.

In the handful of cities where the CMS auctions were trialed, there have been reports of suppliers exiting the market, equipment shortages, consumer complaints and patients going back into the hospital to get such basic equipment as oxygen. Most Medicare patients who routinely receive diabetes testing strips may have problems finding the strips that correspond with their device, leading consumers to buy new devices or discouraging them from basic testing and monitoring. While pharmacies can provide these medical strips, Medicare pays 2.6 times more for these products, negating any savings from the auction program.

The problem can be easily fixed by eliminating faulty auction rules and encouraging real competitive bidding for commodity-like medical equipment. But, no one at the CMS is listening. The adverse consequences of their inaction will lead to worse outcomes for patients and higher costs as patients go from homecare to hospital care; and that, unfortunately, will be the price of regulatory malpractice.

 

Steve Pociask is president of the American Consumer Institute, an educational and research nonprofit organization.

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