Time to rethink Medicare's equipment bidding process?

Medicare’s current inefficient competitive bidding process for medical equipment and supplies is causing less vendors to submit bids – to the detriment of patients, according to Pacific Research Institute’s report, “Reforming CMS’ Competitive Bidding Process to Improve Quality and Sustainability.”

In contrast to most bidding processes that award contracts to the lowest bidders, the Centers for Medicare and Medicaid Services uses the median of the winning bids as the compensation price, “which only creates uncertainty and potential losses for bidders,” according to Dr. Wayne Winegarden, the report’s author.

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“For example, if a potential supplier was selected after bidding $10 per unit, but the median bid was $5 per unit, then the vendor would only receive compensation of $5 per unit despite its bid being 100 percent higher,” Winegarden writes. “Further, at $5 per unit in compensation, the supplier would be subject to potential losses.”

Moreover, since the winning vendor has the right to view the median bid and then decide whether or not to participate, Congress now requires all bidders to submit a $50,000 “bid surety bond” – which the winning bidder must forfeit if the vendor decides to not participate.

“By imposing a cost on bidders who decide not to participate in the program after being selected, the surety bonds are an important step in reducing the problems created when bidders do not have to follow through with their bids,” he writes. “However, the surety bonds do not address the repayment uncertainty problem created by setting the reimbursement price equal to the median bid. Therefore, by themselves, requiring surety bonds is an insufficient reform and the current auction process still incents economic inefficiencies.”

Vendors can also game the process by intentionally underbidding the economically viable price in order to reduce the profitability of their competitors, Winegarden writes.

“Due to uneconomical winning bids, suppliers are being driven out of the market, creating supply shortages and a bias toward lower quality equipment and supplies,” he writes. “When coupled with patients forgoing the use of the sub-standard devices that are being offered, patient health outcomes are suffering.”

For example, a survey showed that under the competitive bidding program, Medicare suppliers were not offering most of the products that Medicare.gov said would be available for patients with diabetes. There is also now a lack of availability of home oxygen equipment, which can negatively impact the health of patients with chronic obstructive pulmonary disease.

“CMS should replace its current methodology of setting the reimbursement price at the median winning bid,” Winegarden writes. “In its stead, CMS should set the reimbursement price equal to the bid that is just high enough to ensure enough suppliers will produce the right quantity and quality of…goods and services. Such a system would, essentially, replace the current bidding program with a more efficient market-based auction system.”