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For a long time Medicare has overpaid on medical supplies and equipment for beneficiaries. They paid based on a fee schedule which is a list of types of products and prices that they will pay. The problem is that fee schedules are prone to abuse. First if they are to be even remotely effective they must be updated regularly to reflect the current cost of supplies. Second when a fee schedule states that Medicare will pay up to $X then suppliers simply charge that amount. This is why you see so many commercials about supplying Medicare beneficiaries with scooters or diabetic supplies or what not.

Luckily Medicare is finally doing something about this problem. They made the following announcement January 30th, 2012:

The Centers for Medicare & Medicaid Services (CMS) today announced lower prices that will go into effect for Medicare beneficiaries this July in a major expansion of the Medicare Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) Competitive Bidding Program.  This program, already underway in nine areas of the country, is an essential tool to help Medicare set appropriate payment rates for DMEPOS items and save money for beneficiaries and taxpayers.   Traditionally, Medicare pays for DMEPOS items using a fee schedule that is generally based on historic supplier charges from the 1980s. Numerous studies from the Department of Health and Human Services Office of Inspector General and the Government Accountability Office have shown these fee schedule prices to be excessive, and taxpayers and Medicare beneficiaries bear the burden of these excessive payments.

Under the program, DMEPOS suppliers compete to become Medicare contract suppliers by submitting bids to furnish certain items in competitive bidding areas.  The new, lower payment amounts resulting from the competition will replace the fee schedule amounts for the bid items in these areas. The first round of the program, which went into effect in nine areas of the country on January 1, 2011, has saved hundreds of millions of dollars while preserving beneficiary access to quality items.  The payment amounts from the supplier competition for Round 2 of the program are projected to result in average savings of 45 percent as compared to the current fee schedule prices.  The payment amounts for the national mail-order program for diabetic testing supplies are projected to result in average savings of 72 percent.  Round 2 of the program is scheduled to go into effect in 91 major metropolitan areas on July 1, 2013. The national mail-order competition will be implemented at the same time and will include all parts of the United States, including the 50 States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, and American Samoa.


So what does this mean? It means that Medicare will longer pick a number out of a hat to decide how much to pay for medical supplies. Rather the market will determine what a fair price for it is. Huh, what a concept?

The next question is how much will this save the country? Well I can’t determine that because they are only applying this to specific categories of products. What I can tell you is that in 2013 Medicare is projected to spend $3.1 billion on non-durable medical products and $8.5 billion on durable medical equipment (CMS National Health Care Expenditure Projections). Also I can tell you that in round 1 of competitive bidding Medicare saved:

  1. 41% on Oxygen, oxygen equipment & Supplies
  2. 36% on Standard (power and manual) Wheelchairs, Scooters, & Accessories
  3. 41% on Enteral Nutrients, Equipment & Supplies
  4. 47% on CPAP/RAD & Related Supplies & Accessories
  5. 44% on Hospital Beds & Accessories
  6. 46% on Walkers & Accessories
  7. 63% on Support Surfaces (Group 2 Mattresses & Overlays)
  8. 41% on NPWT Pumps & Related Supplies & Accessories

I would like to note an observation, the average of those % savings is 44.8%, the intro mentions and average of 45% which is what 44.8% would round to. That implies that the average reported is a biased average of the saving. The correct average should be a weighted average based on the amount spent in each category. That means we can’t apply the 45% saving to the total $ spend on durable and non-durable medical supplies / equipment numbers I cited above since we don’t know how much is spent in each category. But what is apparent is that this program if implemented nationally for all types of products could easily save the country several billion dollars.

Furthermore I would like to point out that some states use fee schedules for items Medicaid covers. I don’t know which all do that but I know TX does. So implementing a similar program for Medicaid nationwide would likely save a lot of money too.

At this point you are probably wondering if this has had an impact on beneficiaries. The last thing we want to do is save money on health care at the cost of the health of beneficiaries. Well according to the same announcement by CMS round 1 has not had negative health impacts on beneficiaries.

Importantly, the program has maintained beneficiary access to quality products from accredited suppliers in the Round 1 Rebid areas. Extensive real-time monitoring data have shown successful implementation with very few beneficiary complaints and no negative impact on beneficiary health status based on measures such as hospitalizations, length of hospital stay, and number of emergency room visits compared to non-competitive bidding areas.

Thus Medicare has finally realized that the prices for medical products needs to be based on current fair market prices. Doing so has saved an immense amount of money without sacrificing the health of beneficiaries. Now this same idea needs expanded to cover other area of Medicare as well as cover Medicaid programs. This is one of the means by which we as a nation can bring down health care expenditures without a negative impact on the health of the nation.