The Indianapolis Star

Kerry Anne McGeary

For years, some economists and members of the medical community have argued that the health-care system, particularly Medicare, would function better under free-market forces because it would improve competition and, potentially, foster innovation. The free market would invigorate the industry, opening doors to new companies and providing consumers improved services at lower prices.

Congress has taken steps to move toward a market-based system and along the way has illustrated the difficulties that may arise during the journey. With the Balanced Budget Act of 1997, Congress pushed for the return to market forces through competitive bidding. However, the bidding processes do little to create a free market and may do more harm. A poorly designed process that probably should be fixed will soon affect Medicare beneficiaries in Indiana and the rest of the country.

The problem originates with the Centers for Medicare and Medicaid Services (CMS), which reimburse suppliers of durable medical equipment based on a fee schedule from 25 years ago that, in many cases, does not accurately reflect current market prices.

In recent testimony before a congressional subcommittee, Laurence D. Wilson, director of the chronic care policy group at CMS, cited one example: A standard power mobility device may be available online for $1,300, but, using an outdated fee schedule, CMS will pay $3,641.

After designing the competitive bidding process, CMS tested it with a series of demonstration projects during 1999-2002 in Polk County, Fla., and San Antonio, Texas. In an academic peer-reviewed paper, Brett Katzman and I analyze these projects, suggesting that the bidding design had numerous flaws that could potentially result in reduced access and higher prices on items with the greatest demand.

Still, in 2008 CMS attempted to start the first phase of the new process in 10 metropolitan areas, including Richmond, Ind. The second phase was set to begin in 2009 in 50 additional metropolitan areas (which will affect Indianapolis, Carmel, Lowell, Rensselaer, Westville, Hebron and parts of Jefferson County). In response to bidder complaints, Congress implemented the Medicare Improvements for Patients and Providers Act of 2008, forcing an 18-month delay of both phases. After minor revision, Phase I proceeded with a round of bidding in 2009, the winning bidders are being offered contracts now, and a new price structure is due to begin on Jan. 1, 2011.

Unfortunately, the process remains seriously flawed. Recently, in a letter to Pete Stark, chairman of the congressional subcommittee on health, and other ranking members of the U.S. House, Peter Cramton, an economist trained in auction theory, and 166 other auction theorists suggest there are four fundamental flaws with the design.

These problems ensure that taxpayers and Medicare beneficiaries may not benefit from a more competitive market. Unfortunately, in steps inconsistent with all economic reason, it seems that Congress and CMS are assessing a larger weight to the costs already sunk into this program rather than considering the marginal costs and benefits of a redesign.

McGeary is Phyllis A. Miller professor of health economics at Ball State University.