Competitive Bidding–What could be more American? Free enterprise driving down the costs of health care in America is a dream come true. It sounds very appealing, especially for Congress and regulators, but is there a down side? Although the Health Care Financing Administration (HCFA) already has proclaimed success from its competitive bidding demonstration projects in Polk County, Fla. and San Antonio, Texas, the jury is still out on the long-term effects for beneficiaries and the competitiveness of the home care market.
The second demonstration which began Feb.1 in San Antonio, Texas, will run until Dec. 31, 2002. HCFA received 170 bids from 79 different suppliers for the following items and services: home oxygen services, manual wheelchairs, respiratory medications, hospital beds and non- customized orthotics. At this writing, we are waiting for HCFA to announce the new winners–and the change in pricing, if any–for the second round of the demonstration projects in Polk County, Fla. According to HCFA’s press release, Medicare spends about $6 billion annually on DMEPOS items and services. Even though these expenditures account only for approximately 3 percent of the entire Medicare budget, it is not hard to see why competitive bidding seems like the answer to controlling Medicare costs, especially with baby boomers’ retirement on the horizon.
The flaw in the competitive bidding approach is that it fails to account for the role that choice plays in determining quality health care. Policy makers who support competitive bidding would like for the public to believe that what they are doing is similar to what happens in the private market. But, the analogy to the private market is misleading when applied to health care. While it may be attractive for policy makers to propose competitive bidding or competitive pricing as the way for Medicare to obtain better prices for home care products and services, the process that HCFA has chosen for its demonstration projects does not represent a competitive market. Instead, by reducing beneficiary choice, the policy makers at HCFA and in Congress are controlling the pool of potential providers that beneficiaries can choose from, and they are threatening a system that is not broken.
The flaw in the competitive bidding approach is that it fails to account for the role that choice plays in determining quality health care.
First, although it’s tempting to think that market-oriented purchasing techniques can solve the issues facing the Medicare program, the key to preserving quality health care is through patient choice. While competitive bidding may result in lower pricing initially, this artificial pricing mechanism creates a small pool of providers, which over time, results in diminished savings and quality that erodes. This point was at least alluded to in HCFA’s recently released first-year annual evaluation report: Evaluation of Medicare’s Competitive Bidding Demonstration for DMEPOS. The report states: “Further, if demand for services is constant, competitive bidding will almost certainly reduce the total revenue available to suppliers and shift the remaining revenue to fewer suppliers. Thus, we would expect some suppliers who do not bid or whose bids are not accepted to be driven out of the local market.”
A recent report by the American Academy of Actuaries makes the point that competitive bidding is in fact anti-competitive, noting that as competitors are driven out of the market, prices increase because of decreased competition. The results from the San Antonio bidding offer an early glimpse of how price increases can occur: for the items that also were bid in Polk County–oxygen and hospital beds–the final bid pricing was higher than it had been in Polk County. For example, in Polk County, the maximum allowance for HCPCS code EO424RR was $181.59. In San Antonio, the maximum allowance was $190.47. The maximum allowance for EO250RRKH was $62.58 in Polk County. In San Antonio, the maximum allowance for the same item was $73.06.
The disparity in pricing for the same item in different parts of the country also raises questions of fairness to Medicare beneficiaries who may have better access and service in areas were the bid prices are higher. A similar point was made in the report by the American Academy of Actuaries which also identifies a number of unintended consequences of government sponsored competitive bidding. One is the troubling possibility that as competitors are driven from the Medicare market, they focus on other payer sources creating a two tiered health care system with better access and quality in the private pay sector. The current competitive bidding model for DMEPOS would promote the existence of different tiers of access and service within the same program. This is undesirable in a national program intended to provide a uniform standard of care. At the very least, this disparity calls into question the ability for the Medicare program to administer competitive bidding effectively on a national scale. Even with i
ts new name and new administration, the organizational issues at HCFA are not likely to be resolved soon.
Second, the current Medicare infrastructure cannot support the model of competitive bidding that has been advanced. There is little of substance in place to truly monitor the quality of care received by the beneficiaries caught in these experiments. Even before the end of the first demonstration round in Polk County, HCFA had broken one of the promises it made to the citizens there. HCFA literature on the Polk County demonstrations included numerous promises of beneficiary protections. The most important and innovative safeguard touted by HCFA was that it would maintain an on-site ombudsman to interface with the provider community and the beneficiaries. The ombudsman is no longer on site. She resigned her post in the middle of a tight job market, and HCFA was unable to find a replacement willing to live in Polk County. Instead, beneficiaries have access to the ombudsman only via a toll free phone number.
While it may result in lower pricing initially, this artificial pricing mechanism creates a small pool of providers.
Finally, another weakness in the current model is that true savings may be difficult to achieve because of the complexity of administering the program. The savings HCFA anticipated have not fully materialized. In Polk County, for example, HCFA officials conceded that they spent “about a million dollars” for savings of about “a million.” Clearly, the administrative complexity of competitive bidding would make it difficult and costly to implement rationally on a national scale.
It’s interesting to note that policy makers and the health care community have come full circle on the value of reducing costs by eliminating choice. With the advent of managed care, many believed that they had finally uncovered the model that would save money and improve–or at least preserve–quality. This would be accomplished using a variety of mechanisms. One popular model was to establish the physician gatekeeper who had to approve the patient’s access to specialists. Managed care has not lived up to its initial promise, there are many examples to highlight this point–including more than a few tragic stories about patients not getting timely care by the appropriate specialists. These managed care horror stories have become so notorious that the insurance companies and their doctors have been the butt of jokes in movies and national television. Congress had to act in 1996 to stop the practice of drive-by-deliveries when it mandated minimum hospital stays for mothers and their newborn babies under the
Health Insurance Portability and Accountability Act of 1996 (HIPAA).
Today, the disillusion with managed care and its promises is evident in the push for the Patients’ Bill of Rights, which recently passed. Clearly Congress believes that enrollees in commercial insurance plans need protection because, although there was an argument about a few key issues (such as a patient’s right to sue), both Democrats and Republicans believe that this legislation was necessary. Among the patient rights that will be addressed in the legislation is the availability of increased choice for managed care enrollees. Medicare beneficiaries, on the other hand, are subject to fewer choices through experiments such as the competitive bidding demonstrations.
HCFA’s first annual report on the competitive bidding demonstrations predictably expounds on the financial savings achieved from the first round of bidding in Polk County, Fla. However it makes a point that we support. It states that it is too early in the process to know the long-term effects upon the beneficiary, access, quality, product selection, and the competitiveness of the market. Make no mistake about it; there will be unintended consequences. It’s just that it’s too soon to know what those might be. The health care industry as a whole, and the DMEPOS community in particular, must continue to work to make policy makers aware of the fallacies that underlie their support for competitive bidding.