Regulatory bid-rigging will cost medical patients

Steve Pociask President, American Consumer Institute
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What if regulations prevented your doctor from prescribing you the correct course of treatment for your illness? Thanks to a seriously flawed medical device auction program that the Centers for Medicare and Medicaid (CMS) is planning to implement, that could start happening soon. The program, if not fixed, will reduce patient access to prescribed medical supplies for home use, as well as worsen patient outcomes and increase medical costs.

Eight years ago, Congress introduced legislation that would set up 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. The Congressional Budget Office (CBO) estimated that a competitive bidding system would result in billions of dollars of savings, so Congress passed the legislation into law.

Following years of delays, 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, the chief of the CBO’s 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.” He 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 will encourage bidders to underbid in order to remain longer in the auction, and it means that bids may not be aligned with supplier costs.

A second flaw in the program allows supplier bids to be nonbinding. In other words, if a supplier underbids in order to remain in the auction longer and if the winning price is ultimately deemed too low, the supplier can just walk away from the auction and refuse to supply the product at the winning price.

These two flaws will encourage 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 budget on medical home equipment by limiting supply, the cost of medical care in the total economy will increase. This is a really bad trade-off for patients and constitutes regulatory malpractice.

The CMS is now expanding this flawed auction program to 91 metropolitan areas and has been predicting billions of dollars of savings from the program. Unfortunately, the savings that the auction program is 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 estimates 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 estimates that the chill in innovation and investment that the CMS program would produce would cost the U.S. economy $50 billion and impose a loss of about 5 million life-years. An American Consumer Institute report finds that by limiting access to a technology called negative pressure wound therapy, these regulatory rules would lead to increased patient reinfections, amputations, hospitalization and prosthetics. These studies show that the costs of the new program would significantly outweigh the benefits.

The auction’s flaws were pointed out last year in a letter to Congress signed by 167 economists and auction experts, but the CMS seems to have ignored these concerns. Then, in 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 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 be worse outcomes for patients and higher costs as patients go from homecare to hospital care. That, unfortunately, will be the price of regulatory malpractice.

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