Reality Check: Competitive Bidding Program Myths Versus Facts


The Medicare DMEPOS Competitive Bidding Program

Myths Versus Facts

Reality Check


Recently CMS released a document titled “The Medicare DMEPOS Competitive Bidding Programs: Myths vs. Facts”. This document outlined what CMS described as “Myths” of the Competitive Bidding Program. One by one CMS detailed the “Facts” they believe disprove the “Myths”. The document fell short of truly digging into the issues and curtailing the worries of industry pundits and DME providers nation wide.

John Shirvinsky, the Executive Director of the Pennsylvania Association of Medical Suppliers (PAMS), detailed the providers’ point of view and appended each “Fact” CMS explained in their document with a Reality Check describing what is truly happening in the marketplace.

MYTH: Competitive bidding has caused a big reduction in utilization of DME products.

FACT: CMS has closely monitored the results of the competitive bidding program since implementation on January 1, 2011, through a real‐time claims monitoring system that analyzes the utilization of items in the nine product categories in all competitive bidding areas.

For the first year of the program, the real‐time claims monitoring and subsequent follow‐up has indicated that beneficiaries’ continue to have access to necessary and appropriate items and supplies. Moreover, the rate of use of hospital services, emergency room visits, physician visits, and skilled nursing facility care in areas with competitive bidding has remained consistent with the patterns and trends seen throughout the rest of the country.

CMS’s monitoring revealed larger declines in competitive bidding areas as compared to non‐competitive bidding areas in the use of two products, mail‐order diabetes test strips and continuous positive airway pressure (CPAP) supplies. In response to these declines, CMS initiated calls to users of these supplies in the nine competitive areas. The calls revealed that in virtually every case, the beneficiary reported having more than enough supplies on hand, often multiple months’ worth, and therefore did not need to obtain additional supplies when the program began.

REALITY CHECK: Preliminary (but incomplete) CMS data suggested an unusual decline in DME utilization that appeared to be limited to Round One Rebid areas.

CMS has refused to approve the release of data that was assembled in response to a FOIA request for Round One utilization data submitted by university researchers. The CMS bidding program has been cloaked in secrecy since its inception and independent sources have been unable to verify much of the data that has been assembled and presented by CMS. Complete transparency is typically a hallmark of competitive bidding programs. Unfortunately, CMS continues to obstruct independent analysis of any data related to this program and offers no data to support its claims here.

MYTH: The low payments made under competitive bidding will force manufacturers to provide only low quality equipment.

FACT: Medicare requires that all suppliers in the program meet applicable state licensure requirements, meet strict quality and business standards, and be accredited by a national accreditation organization.

Quality product‐specific service standards include intake, delivery and setup, training and instruction of the beneficiary and/or their caregiver, and follow‐up service. Business standards focus on administration, financial management, human resource management, consumer services, performance management, product safety, and information management. The quality standards ensure that Medicare beneficiaries only receive products as ordered by their physician. Products must meet applicable quality standards and be provided by qualified professionals.

The program includes an anti‐discrimination policy, meaning that suppliers have to offer their Medicare beneficiaries the same products they offer their other customers. This applies to all product categories.

All items furnished under the competitive bidding program must meet applicable Food and Drug Administration requirements, including regulation and medical device effectiveness and safety standards. CMS believes beneficiaries are receiving quality items under the competitive bidding program because the agency has received few inquiries and complaints about the program and because the real‐time monitoring shows that there have been no changes in beneficiary health status outcomes resulting from the competitive bidding program.

REALITY CHECK: It would be helpful if CMS didn’t mislead Congress by misrepresenting legitimate concerns that have been raised. As economists will confirm, when rates are set too low, businesses that participate in that market will respond by either exiting the market or by slashing operating costs.

One of the most significant costs in the DME market is the cost of the equipment itself. When faced with a massive 45 percent cut in reimbursements, it only stands to reason that winning bidders will seek to minimize expenses wherever possible, and that includes the cost of equipment.

To deny that this is a possibility is to deny reality. While it is unfortunate, many contract winners will choose low cost/low quality products manufactured abroad over higher cost/higher quality equipment manufactured in the USA. In other words, more jobs will be shipped overseas. This is an undeniable economic reality.

MYTH: Competitive bidding will lead to less competition in the market, and will hurt the long‐term sustainability of the DME benefit due to fewer suppliers wanting to participate.

FACT: The competitive bidding program includes numerous provisions to ensure a robust, competitive market. For example, CMS selects more than enough suppliers to meet demand. As a general rule for contract supplier selection purposes, CMS does not credit more than 20 percent of the total Medicare demand for a product category in a competitive bidding area to any one supplier, meaning at least five suppliers serve most product categories most areas (most areas have significantly more suppliers).

For example, in the Bakersfield‐Delano, CA competitive bidding area, 23 bidders were offered contracts for wheelchairs and scooters (34 total locations) and 22 bidders were offered contracts for CPAP supplies (35 total locations).

In addition, CMS has taken specific steps to ensure that small suppliers can be considered for participation in the competitive bidding program. These steps include offering small suppliers the opportunity to form networks, a small supplier target, and not requiring suppliers to submit bids for all product categories.

REALITY CHECK: CMS continues to ignore who requires home medical equipment under the Medicare program: the elderly, the disabled and the infirmed. These are populations that rely heavily on the convenience and reliability of local providers.

In the Philadelphia bid area, CMS eliminated 96 percent of consumer choices for a wheelchair provider. Ninety-eight percent of local wheelchair providers were eliminated in both the Scranton-Wilkes Barre and Allentown-Bethlehem-Easton competitive bidding areas.

The elimination of local providers was typically in this range across the United States. By any measure, this is an inexcusable elimination of competition and a reckless elimination of consumer choice.

MYTH: CMS has been very secretive about this process, and there is no transparency around how they set the bids and how they run the program.

FACT: CMS has been as open and transparent as the law allows throughout the entire development and implementation of the program. CMS held numerous Program Oversight & Advisory Committee (PAOC) meetings and open door forums, went through notice and comment rulemaking, and released information through listserv messages and ongoing educational and outreach programs. CMS has been very forthcoming with how the program was designed, how the single payment amounts are set, and how each supplier and their bid is evaluated. However, CMS is unable to release bid data as that information is proprietary and confidential.

REALITY CHECK: The PAOC meetings and Open Door forums were perfunctory exercises in which provider input was routinely ignored. The critical need for transparency is in the operation of the actual bid process.

One of the world’s leading auction experts described CMS’s lack of transparency thusly, “In the Medicare auctions, it is unclear how demand and bidder capacities are determined. Other than price bids, these are the two main inputs that determine the winners and the product prices. In addition, both quality standards and performance obligations are unclear. Lack of transparency is unacceptable in a government auction. It leads to fraud and corruption, and is in sharp contrast to well-run government auctions such as the Federal Communications Commission spectrum auctions.”

Since the Medicare DMEPOS bid program is the only known bid process in the country to not abide by the normal rules of transparency that are common to all public auctions, it is incumbent upon CMS to demonstrate to Congress exactly how it is that Congress intended that the Medicare DMEPOS bid program not follow a similar structure to other government auctions, which are transparent.

MYTH: Because CMS didn’t require bids to be binding, we’ve heard of many “fly by night” companies that have submitted really low suicide bids and that is why the single payment rates are so low and any reputable supplier can’t afford to provide products at such low prices.

FACT: Binding bids: Though CMS does not have authority under this program to require suppliers to submit a binding bid, 92 percent of suppliers offered contracts in the Round 1 Rebid accepted them.

There has been no indication of any beneficiary access problems, and CMS has not had to add any new suppliers to meet demand. Furthermore, CMS does not feel it would be in the best interest of the beneficiary to force a supplier to provide services in a patient’s home when the supplier does not want to participate.

Suicide bids: CMS has a robust screening process in place to make sure that all bids are bona fide (in other words, realistic). CMS also requests additional documentation from suppliers for certain bids if the agency identifies a bid as potentially non-bon afide, and CMS rejects any bids that do not pass this evaluation.

REALITY CHECK: Binding bids: As leading economists have previously pointed out, the acceptance rate, 92% or otherwise, is a poor measure of performance and certainly inadequate to conclude that the program does not require redesign. The number is extremely misleading, since it is not weighted by supplier capacity nor does it control for supplier experience and quality.

Auction experts tell us that “the frequency of low-ball bidding will be highest among 1) small suppliers, since small suppliers are less able to invest in the information necessary to develop sophisticated bidding strategies; 2) more-desperate suppliers, who do not have good alternatives, such as suppliers that offer poor services or are near bankruptcy; and 3) suppliers more willing to engage in fraud, corruption, or other abuse and who therefore can make extremely low prices work for them, while causing enormous harm to Medicare beneficiaries and taxpayers.”

It is indisputable that CMS has awarded an inordinate number of contracts across the nation to small and underfunded companies who were likely low-ball bidders. It is also indisputable that many of these same firms also violated basic bids rules, such as having secured necessary state licenses prior to submitting bids, and thus distorted the bid pool and resulting payment amounts.

Suicide Bids: There is broad agreement among auction experts and economists that the CMS bid design encourages the submission of low-ball or “suicide” bids.

The reality of Round 2 bid results, a 45 percent reduction in reimbursement rates in an industry that averages a five percent net profit, should settle that score on its face. Like almost everything else associated with this program, the CMS screening process is secretive and not open for independent evaluation.

The whole point of a binding bid is to elicit responsible bids. All other bid programs make it abundantly clear up front that bids are binding and, as such, that bidders should be prepared to live with the bids they submit if offered a contract. No one is forced to bid, but if they do, they must live with the bids they submit. Such a process is specifically designed to discourage low-ball, suicide bids. This is to the benefit of the program.

MYTH: CMS inappropriately manipulated provider capacity when calculating the single payment amounts, and that’s why the single payment amounts don’t really reflect true market prices, they are much too low.

FACT: CMS calculates the projected beneficiary demand for each product category in each competitive bidding area using historical claims data, plus trending factors.

To evaluate the capacity of a supplier that plans to expand its capacity (i.e., total estimated capacity exceeds historic claims in the competitive bidding area or product category), CMS looks at the expansion plan as well as the hardcopy financial documents to determine the ability of that supplier to furnish its estimated capacity.

If a supplier is new to an area, new to a product category, or submits estimated capacity that represents substantial growth over current levels, CMS may conduct a more detailed evaluation of that supplier’s expansion plan to verify the supplier’s ability to provide items and services in the competitive bidding area on day one of the contract period.

If a bidder’s financial health and expansion plan do not support the supplier’s estimated capacity, CMS will adjust the capacity to the supplier’s historic level.

In addition, to help ensure that there are multiple suppliers for all items in each competitive bidding area, each bidder’s estimated capacity, for purposes of bid evaluation only is limited to 20 percent of the expected beneficiary demand for a product category in a competitive bidding area. This policy ensures that multiple contract suppliers for each product category are selected and that more than enough contract suppliers are selected to meet demand for items and services in the area. This adjustment does not limit the number of items a supplier could furnish if awarded a contract. This adjustment does not apply to the national mail‐order competition.

REALITY CHECK: Given the lack of transparency in the program, it is difficult to know how CMS arrived at its capacity calculation. Recent analysis for the Pittsburgh Round One bid area revealed that, of the 58 percent of total bid winners that were located outside the Pittsburgh market, at least 71 percent continue to be no-shows in that marketplace. This represents capacity that was denied to local providers who were willing and able to provide product and service to Medicare beneficiaries.

MYTH: Why would CMS choose to use the median bid instead of the maximum bid to set the single payment amount? It’s unfair to suppliers to ask half of them to take a payment rate less than what they can afford. This will destroy the market.

FACT: Under the program, the single payment amount for an item furnished under a competitive bidding program is equal to the median of the bids submitted for that item by suppliers whose composite bids for the product category that includes the item are equal to or below the pivotal bid for that product category. If there is an even number of bids, the single payment amount for the item is equal to the average of the two middle bids.

In the proposed rule published May 1, 2006, CMS discussed various approaches the agency considered for setting the single payment amounts, including taking the maximum winning bid for each item. Using the maximum bid would have led to payment amounts that were higher than necessary because some suppliers were willing to provide the items at a lower price.

CMS believes that setting the single payment amount at the median of the bids results in what the agency considers a reasonable payment amount based on prices available in the marketplace. This methodology reduces the effect of excessively high or low bids and helps to ensure savings for the Medicare program.

Accordingly, CMS believes it is consistent with the intent of competitive bidding.

REALITY CHECK: The CMS median price design is unique to auction design and runs counter to all experience in the auction literature. This structure exists nowhere else in the world and reflects a complete misunderstanding of supply and demand. CMS touts large price reductions as a result of its “competitive bidding” process, but economists tell us that low prices should not be the objective. Rather, the goal should be getting the price “right”, at the point where supply meets demand. The CMS process fails this in two respects.

First, supply is not truly reflected in the CMS system because providers are not bidding costs, something directly caused by the CMS median price and non-binding bid rules.

Second, rather than pinpointing the level of demand necessary to help seniors, CMS instead plays a shell game with demand levels, arbitrarily raising them until the auction produces a price that “looks good”, but not one that is anywhere close to “right”.

The bottom line is that competition is not setting the prices. CMS is setting prices through a secretive, manipulative process that does not meet the congressional mandate for a competitive acquisition process. In a normal auction of this type, the clearing price is the right price.

It is important to note that a clearing price, the price at which supply meets demand, is not the “maximum” bid, as CMS suggests.

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