Editor’s Note:  The reference in the sub-headline of the article below to the program’s “supporters” refers only to CMS, not to independent experts who have analyzed the program.

From: Healthcare Finance News

But supporters decry the research results

Critics of a pilot program designed to lower the cost of medical equipment purchased by the Centers for Medicare & Medicaid Services (CMS) recently received support for their concerns in a new report released by the California Institute of Technology (Caltech). But while the models used by researchers confirmed earlier outside assessments of the program, the director of the program says the researchers got it wrong.

Under the Medicare Modernization Act of 2003, CMS was required to establish a competitive bidding program with the goal of lowering the overall cost of durable medical equipment such as wheelchairs, hospital beds and oxygen tanks.  In 2011, CMS tested such a program in nine metropolitan areas across the country.

While federal officials point to cost savings for taxpayers under the program – and that, too, is up for debate – on the whole, critics contend that the program is not working effectively as it is currently structured.

In the Caltech report, which was published in April in The Quarterly Journal of Economics, a research team led by Caltech professor Charles Plott used computer simulations to test and compare the structure of the CMS auction program and other similar auctions. One of the chief findings of the report, which supports what critics have been saying, is that outcomes in the CMS auction are not consistent with the policy objectives of getting adequate procurement and achieving efficiency levels relative to the excluded-bid auction.

The Caltech team is viewing the program “as if it should be some kind of commodities auction,” responded Laurence Wilson, director of CMS’ chronic care policy group. The reality, he argues, is that because the program is providing a broad range of services to beneficiaries in their homes, there are numerous factors that make the CMS program “very different” from the models that were tested

For example, as to the report’s claim that prices generated in the CMS auction are significantly and consistently lower than the competitive price, Wilson said that 92 percent of the equipment vendors who participated in the first year of the bidding program ended up accepting the contracts they were offered, demonstrating that the vendors themselves must have found the pricing fair

While arguments over the program’s structure rage on, its primary goal is to save taxpayers money by driving down the cost of durable equipment. Critics, supported by Caltech’s report, say that the competitive bidding program isn’t achieving its primary goal of saving taxpayers money, but, not surprisingly, that, too, is also up for debate

Testifying recently before the House Ways & Means Committee, CMS’ Wilson reported that the trial program “saved the Medicare fee-for-service program approximately $202.1 million.”

But according to Peter Cramton, professor of economics at the University of Maryland, “The CMS estimate is a gross overestimate of savings. They are simply calculating the direct cost reduction without considering the indirect cost increases caused by inefficient substitution.

As an example, he cites the hypothetical situation of a diabetic who cannot get his diabetes test strips from his former mail order supplier, so he switches to a local pharmacy. “Since the retail pharmacy is not part of competitive bidding, Medicare records (the patient’s) shift from (a) cheap mail order to (an) expensive pharmacy purchase as a huge cost savings.” The real result, Cramton says, is that “Medicare pays about 260 percent more.”

Before arguments get too heated, it’s important to remember that the competitive bidding program has been live for only the past year, cautioned Walt Gorski, vice president for government affairs at the American Association for Homecare. “It’s a trial, in nine areas.

Far from applauding the program, though, he said his organization’s “assessment gives (it) generally low marks across the board.” The program’s most fatal flaw, he said, is that it creates an unsustainable reimbursement rate for the term of the contract, a problem which will become more pronounced as the program is expanded to 91 new areas across the country, currently scheduled for next year, and then is implemented nationwide after 2014.