Get Started: Owners call Medicare bid rates unfair

Radhika Sivadi

3 min read ·



A new bidding program may be saving Medicare hundreds of millions of dollars but is squeezing small companies with unreasonably low rates, according to business owners who testified last week before a Congressional committee.

Medicare is preparing to expand a new competitive bidding program for medical products and equipment such as oxygen therapy devices, wheelchairs and walkers. Medicare will take bids from companies who want to sell their medical equipment and use those prices to calculate what it is willing to pay. Medicare will then offer contracts to companies that make the lowest realistic bids.

The program was tested in nine regions in 2011, and Medicare says it saved more than $200 million that year while handing out many contracts to small businesses. Medicare said 51 percent of the winning bidders in that pilot program were companies with less than $3.5 million in annual revenue.

Medicare describes the program as an "auction." But critics note that in a traditional auction process, low bidders wouldn't be allowed to pull their bids. In the current Medicare process companies can submit very low bids and then withdraw them — but Medicare will still factor those "low-ball" bids into its calculations to determine how much it will offer to pay. That hurts small medical equipment businesses which could generate a large chunk of their revenue from Medicare but which can't afford to sell their products at a loss.

Tammy Zelenko, who runs a Pittsburgh-area company called Advacare Home Services that sells products such as home oxygen devices and hospital beds, told the House Subcommittee on Healthcare and Technology last week that Medicare sometimes offers contracts at rates lower than the prices that companies have actually bid. But companies feel pressure to accept those contracts because Medicare provides so much of their revenue.

Zelenko said that hurts small businesses and favors bigger firms who can make up their losses on other products.

"CMS has designed a program that does not hold bidders accountable, does not ensure that bidders are qualified or capable to provide the products in the bid markets, and, due to the arbitrary nature of the capacity analysis, has produced bid rates that are financially unsustainable," she testified.

Small bidders also complain that the regions that many Medicare contracts cover are too large for them to service, and ultimately favor larger suppliers.

University of Maryland Economics Professor Peter Cramton agrees the process is deeply flawed and disputes Medicare's reported savings. Cramton is an expert on auction theory who has helped several countries design energy and greenhouse gas auctions. He testified before the subcommittee that the process encourages unreasonably low bids and lacks transparency. Cramton said a true auction process — in which all bids would be binding — would save much more money.

"The (Medicare) design is not an auction at all but an arbitrary pricing process," Cramton said, quoting from a letter that a group of auction experts wrote to the White House in 2011. "The current program is the antithesis of science and contradicts all that is known about proper market design."



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Radhika Sivadi