Home Health & Hospice Week

Economist raises concerns about anti-competitive aspects of CMS initiative.

Durable medical equipment providers have a fresh piece of evidence in their case against national competitive bidding.

Ken Brown, an economics professor at the University of Northern Iowa in Cedar Falls, this month completed an analysis for Waterloo, IA-based VGM & Associates that raises substantial questions about the wisdom of instituting competitive bidding.

While bidding will undoubtedly cut the number of firms serving beneficiaries, Brown's research challenges the idea that the initiative will dramatically cut Medicare costs, as its architects claim.

Starting with the results of the Centers for Medicare & Medicaid Services' NCB demonstration projects in Polk County, FL and San Antonio, Brown analyzed the reduction in potential savings following Federal Employee Health Benefit Plan cuts in reimbursement rates for DME.

Bad news for CMS: "The savings they thought they were going to get are much less," Brown tells Eli. "It's between 40 and 50 percent less."

In light of Brown's analysis, the government should rethink the wisdom of instituting a complex and costly NCB bureaucracy, DME industry advocates say.

"[The report] raises a huge question about why they want to move forward with this," says John Gallagher, VGM's vice president for government relations.

FEHBP Cuts Dramatically Reduce Savings

The November 2003 final report on NCB demonstration project outcomes estimated savings in Polk County at 17.88 percent and in San Antonio at 20.47 percent.

Using utilization data that was readily available, Brown came up with savings estimates very close to those in the NCB report - 18.6 percent in Polk County and 21.06 percent in San Antonio.

Brown then recalculated savings estimates using the 2005 fee schedule with FEHBP cuts. He came up with an estimated savings of 9.54 percent for Polk County and 12.02 percent for San Antonio. That represents an overall savings reduction of 45 percent.

"There's much less to be gained from competitive bidding than was originally thought, and at the expense of a variety of factors that aren't captured by the savings estimate," Brown tells Eli. For example, the government's savings estimates don't account for the costs of implementing competitive bidding.

Not-So-Competitive Bidding

This is not the first time Brown has wrapped his brain around competitive bidding for VGM. Around the time the demonstration projects were wrapping up, VGM asked him whether there were alternatives to NCB that would save a similar amount of money without eliminating many firms.

He suggested that the government simply freeze price increases - a low-cost plan the Congressional Budget Office embraced and that CMS later implemented. However, the government did not drop its bidding plans.

Brown has serious reservations about what the government is calling competitive bidding, he says.

"It is troubling to me as an economist to see the possibility of implementing a program that will eliminate firms," he notes. "The fact that any firm can enter or leave the market at any time forces them to operate as efficiently as possible. As soon as some outside force says no new firms can enter, you've eliminated one of the most important factors for successful competition."

Brown believes a more economically sound approach would be to do what the FEHBP cuts have done: reduce the price the government pays and let firms figure out how to cope. Because once the government begins eliminating suppliers, there will be far less competition when the time comes to bid again - and that will jeopardize continued savings as well as quality of service for beneficiaries.