Durable Medical Equipment: Free Market Principles Will Deliver Best Options for Taxpayers

In 2003, Congress passed the Medicare Modernization Act (MMA – P.L. 108-173). This law made some substantial changes to Medicare and adding competitive forces to the program was a strong theme.

The change most people are aware of is the creation of Medicare Part D, the Medicare prescription drug benefit program. It was the goal of the Bush Administration and many members of Congress to utilize competition between private-sector drug benefit plans to provide seniors access to a broad range of pharmaceuticals and control costs. As a result of market forces, the program’s cost has been 45 percent lower than originally predicted by the Congressional Budget Office (CBO).

The law also made changes to the Medicare+Choice program and created Medicare Advantage (MA) in which seniors get to choose from competing private health insurance plans in order to access health care. In MA, beneficiaries often receive benefits not found in traditional fee-for-service (FFS) Medicare. Plus, they pay a single premium and receive more coordinated care as compared to beneficiaries in FFS Medicare who pay separate premiums for Parts A, B and supplemental policies.

Wanting to expand market-based forces even further in Medicare, Congress decided to bring competition to durable medical equipment and in particular prosthetics, orthotics, and supplies (DMEPOS) purchases in Medicare. Its decision to do this was based on the success coming from a provision in the Balanced Budget Act of 1997 that required Medicare to conduct demonstration projects to see if a competitive bidding program for DMEPOS would save money for the taxpayers and beneficiaries. Two such projects were created in Polk County, Florida and San Antonio, Texas. They showed that competition did indeed help Medicare beneficiaries receive quality medical equipment and supplies at fair and reasonable prices.

Prior to the implementation of the competitive bidding program, Medicare paid for DMEPOS based on a fee schedule. The fee was an average of the allowed charges from 1986 and 1987, adjusted by the consumer price index for all urban consumers to allow for inflation. To allow for geographic differences, Medicare used a separate fee schedule for each state. But the pricing mechanism was considered obsolete and payments were inflated compared to the non-Medicare marketplace. To make matters worse there was widespread fraud and abuse.

Once MMA became law, the first round of the competitive bidding program (CBP) was scheduled to begin in 2007 and 2008. DME in the program included: oxygen supplies and equipment; standard power wheelchairs, scooters, and related accessories; complex rehabilitative power wheelchairs and related accessories; mail-order replacement diabetic supplies; CPAP and respiratory assist devices (RADs), and related supplies and accessories; hospital beds and related accessories; walkers and related accessories; support surfaces (special mattresses and overlays); and enteral nutrients, equipment, and supplies. (Enteral nutrients are given directly into the gastrointestinal tract as opposed to parenteral nutrients which are given intravenously.)

But issues were soon raised in two congressional hearings before the House Ways and Means Subcommittee on Health and the House Small Business Subcommittee on Rural and Urban Entrepreneurship in May 2008 about the program and its effects on the DMEPOS suppliers and beneficiaries. In response, Congress passed the Medicare Improvements for Patients and Providers Act (MIPPA, P.L. 110-275) in July 2008. The law revised requirements for the CBP and divided the program’s implementation into two rounds scheduled to take place between 2009 and 2014.

MIPPA immediately terminated the first round of supplier bids just finished under the MMA requirements and reduced Medicare payments for DMEPOS by 9.5 percent to compensate for the loss of the projected Medicare savings due to the termination of CBP round 1. MIPPA required the Center for Medicare & Medicaid Services (CMS) to repeat the bidding process, known as the Round 1 Rebid. This rebid resulted in an award of contracts starting January 1, 2011 for nine competitive bid areas, some seven years since passage of MMA.

Round 2 bidding is now underway and scheduled to be in place by July 2013 but new legislation has been introduced entitled “The Medicare DMEPOS Market Pricing Program Act of 2013 (H.R. 1717)” to stop the competitive bidding program yet again and replace it. The DMEPOS industry has been pushing back on the CBP practically since its inception, claiming that the program is not competition but “just another form of administrative price assignment” like the old fee schedule and that the program “distorts the marketplace and, by ignoring the original demonstration projects …and creating restrictive policies… goes against the original intent of Congress.” The industry argues they are not against competition; they are just against the current competitive bid program. The suppliers say the CBP works because it is operating in only certain sections of the country and therefore suppliers can cover their losses in other areas. But when the program expands, suppliers warn they will not be able to continue to provide DMEPOS based on how the bids are currently awarded. Perhaps the suppliers are just complaining because they now have to really compete and cut their prices or maybe there are real concerns.

Before Congress considers new legislation and votes for further delays to competitive pricing for DMEs, it is important to remember that prior to the CBP, combined expenditures (including beneficiary cost-sharing) for DMEPOS were approximately $14.3 billion in 2010 and about 15.5 million beneficiaries used them. In May 2012, CMS reported that the program has saved the Medicare fee-for-service program approximately $202 million. The CBP is expected to save the Medicare Part B Trust Fund an estimated $25.7 billion and an additional $17.1 billion for beneficiaries between 2013 and 2022. The savings to Medicare mean savings to taxpayers and beneficiaries.

If the current bidding program needs to be improved in order to make it work better and allow seniors to have access to the most advanced medical equipment available while still providing savings to taxpayers, then Congress should undertake a detailed review of the competitive bidding process and find a proficient way to improve it without adding more years of delay and higher costs. This is not the answer for Medicare, already in deep fiscal trouble as more and more baby boomers retire.