Small Business Perspective on the Bidding Program, Part 3: What the Experts Say & What The Government Says

Wednesday's post from Mark Richardson concluded with an endorsement of furthering free market principles in home medical equipment pricing “as long as it doesn’t harm the industry that it’s regulating” but warns that “implementing these prices and this misguided program will harm this industry.  It puts companies out of business by barring half of them from the Medicare program and subjecting the other half of them to prices that cannot be sustained.”

Read the first two entries in this series – A Small Business Story and An Alphabet Soup of Regulation  followed by Fraud Alert and A Fly in the Ointment

What the Experts Say

But don’t take my word for it—these are not just my conclusions—they are the conclusions of many respected economists and auction experts that have been examining CMS’s “Competitive Bidding Program” for several years.  In fact, in June of 2011, 244 concerned auction experts sent a letter to President Obama detailing how the program’s structure would incentivize low-ball bids (bids dramatically below cost) which would lead to market failure.   And more recently, a study by the California Institute of Technology researchers published in the Quarterly Journal of Economics a scathing report detailing this auction’s fatal design and the unorthodox rules that CMS incorporated into the bidding program that will doom it to “face severe difficulties.”   In addition, Professor Peter Cramton, a respected professor of economics at the University of Maryland said on January 30, 2013, “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.”

Some additional flaws of this CMS-dubbed “Competitive Bidding Plan” that have been pointed out by the experts are:

• Bids are non-binding—those who bid don’t have to accept their awards—this encourages “low-ball” bids because providers don’t have anything ultimately to lose if they bid below their true costs.
• The eventual selling price is set at the median of all the winning bids—causing half of the “winners” to receive a price lower than they bid—instead of the more acceptable practice of using the clearing price to pay all winners.  (In addition, as “winners” decline bid awards, the so-called median price does not adjust upward—thereby keeping the price even lower than the real median.)
• The bid areas are too big—they do not reflect the marketplace.  Healthcare is provided at the local level—not by huge mega-companies serving whole Metropolitan Statistical Areas.
• Bids were offered by product category.  Providers can “win” one product category (e.g. hospital beds) but lose another (e.g. wheelchairs).  Then, losers are barred from participating in the categories that they did not “win”.  Instead of continuing to promote competition and maintaining a robust supplier community, this program re-structures business models and puts companies out of business if they did not “win” enough categories of bids.  In addition, this flawed process delays hospital discharges by forcing discharge planners to call and coordinate multiple DMEPOS providers—by product category—for each patient and thus creates unnecessary chaos for the patient as well.

For me and my business, this is catastrophic.  Again, if nothing changes, we will certainly go out of business within a short period of time.  I don’t know of any business in this economy that can absorb a 45% cut in reimbursement, but I certainly know that we can’t sustain our business with that kind of loss. The ironic thing is, we “won” six bid awards—2 of which we declined because we would’ve lost money on every Medicare transaction in those categories—but every one of our awards were offered at levels well below the amounts that we bid.   My company is an accredited, respected, growing company that’s been in business for 42 years and we’re part of the healthcare continuum that actually saves Medicare money by helping to discharge patients from the more expensive institutional part of the system.  It just seems that we are the proverbial baby being thrown out with the bathwater—being driven out of business by our own government because they can’t come up with a fair way to cut costs without destroying our industry.

What the Government Says

If you listen to CMS, their “Competitive Bidding Program” is a great success.  They claim it will save billions of dollars, and they claim that they haven’t had to lower one price.  The DMEPOS industry has submitted these bid prices themselves, they say.  It just proves how much unmitigated profit there was in their prices, they say.  On the surface, it is true that the industry has submitted these bid prices.  What is not true is that the results of this flawed bid process represent anything relative to the industry’s margins.  The problem is that this program has produced exactly what the experts said it would produce—unsustainable suicide bid prices that were placed by providers who feared being barred from the Medicare program all together.  If left unchanged, this will ultimately lead to failure of our entire industry—but only after a lot of companies like mine are already gone.

Mark’s entry concludes Monday with Where are Our Statesmen? and The Solution