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RMU Economist: Medicare Purchasing Program Reduces Competition 

Pittsburgh -- A study by Robert Morris University economist Brian O’Roark of a Medicare medical equipment bidding program has identified several flaws that could lead to higher costs and lower quality care.

Last summer, the Centers for Medicare and Medicaid Services (CMS) implemented a plan to create a competitive bidding process for durable medical equipment, such as motorized wheelchairs and oxygen tanks. Previously, the CMS paid for medical equipment and supplies based on a “reasonable cost” formula that the CMS itself determined.

In February 2008, O’Roark co-authored a paper with Stephen Foreman, associate professor of economics and health administration at RMU, which raised serious questions about the bidding program. Under the reasonable cost system, the CMS sets prices, so no supplier can undercut any other, thus ensuring a large number of suppliers. Furthermore, their products are relatively homogenous, thanks to standards and requirements set by the CMS

O’Roark and Foreman wrote in their original study that rather than stimulate competition and lower prices, as the CMS intended, the switch to a competitive bidding process would squeeze smaller medical equipment firms out of business and reduce competition in the long run.

O’Roark’s latest paper analyzed the first round of the bidding program, which took place in 10 regions starting July 1, 2008. Congress suspended the program two weeks later over concerns about the bidding process. O’Roark found that the CMS drastically misread the marketplace, and that the competitive bidding program—which is set to go into effect again in October—reduces overall competition and hurts the quality of patient care. The study’s findings include:

• Approximately 40 percent of companies awarded durable medical equipment contracts for Pittsburgh patients were located outside of Pennsylvania, forcing customers to deal with less-experienced firms and potentially causing delays in equipment delivery.

• Had the competitive bidding program continued, home care providers would have had to cut service, lengthen patient response times and give up providing some equipment altogether. Contracts were also awarded to unlicensed providers, which would have violated state standards.

• Reduced access and declining quality of care under competitive bidding will force patients into institutionalized care. This will lead to higher long-term costs for Medicare.

• One group that would benefit from competitive bidding is private insurance firms. Since Medicare reimbursement rates are the basis for reimbursement by all other forms of health insurance, an artificial lowering of Medicare rates is immediately followed by a lowering of all others. As price schedules fall, insurance firms’ costs fall with them.

“The bidding program forces an unsustainable business model on the durable medical equipment industry,” said O’Roark, an assistant professor of economics.  “Ninety percent of providers were excluded from participating because they could not meet the bid. Those who qualify are forced to sustain prices for three years—an untenable position for any business.”

O’Roark noted in his study that his analysis did not take into account the spike in demand for durable medical equipment that is expected as baby boomers age. According to O’Roark, that will lead to a shortage of equipment, due to a decreased number of firms, and a jump in prices, with few market forces to contain it.

O’Roark’s research was funded by the Pennsylvania Association of Medical Suppliers.