Bidding on medical devices: A race to the bottom?

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WASHINGTON -- Two months into the rollout of a controversial new Medicare program, it's been quiet for Bill McKendree.

"There have been literally zero complaints so far" about a new competitive bidding program for durable medical equipment such as power wheelchairs and oxygen tanks, said Mr. McKendree, who directs APPRISE, the state's health insurance assistance program, in Allegheny County. "And most of [the calls are] pretty benign stuff."

His office is where calls from patients facing problems with the new program would end up, and since the program began in January, he hasn't heard a critical peep.

But businesses in the device industry and their supporters on Capitol Hill are raising a ruckus, saying the program is a long-term disaster for the companies that make durable medical equipment, and the patients they serve.

In the works since 2003, the competitive bidding program began in nine metropolitan areas, including Pittsburgh. The Centers for Medicare and Medicaid Services solicited bids from companies to supply Medicare Part D beneficiaries in these regions in eight categories of durable medical equipment, from hospital-style beds to diabetic supplies.

The government selected a total of 59 bidders to serve those categories in the Pittsburgh area -- many companies got multiple bids -- because they were willing to offer the products at the lowest cost. The program is intended to stem government's rising costs in the medical device market, and by that measure, CMS is succeeding.

In Pittsburgh, on average, the products are now being offered at a 34 percent discount. Medicare picks up 80 percent of the tab on the equipment, with patients paying the rest, and the competitive bidding program is estimated to save the government $17 billion over 10 years, as it is expanded across the country.

But industry leaders say Medicare has created a race to the bottom with the drastically low prices. John Shirvinsky, the executive director of the Pennsylvania Association of Medical Suppliers, said for a company that runs an average profit of around 5 percent the options are bad and worse -- win a bid and sell your product at a loss or lose it and be shut out of a key market.

"I can't defend my people on this," he said. "It's terribly frustrating to represent an industry and see what they're doing and know that they're signing their own death warrants."

CMS spokeswoman Lorraine Ryan said if device makers are losing money, it's not the government's fault.

"CMS didn't go out and impose a price on everybody," she said. "We wanted to give industry an opportunity to come up with a bid and prices they would be able to provide."

One outcome of the bidding process has been a move away from local providers. By Mr. Shirvinksy's count, 34 of the 59 bid winners are from outside the region. There are more than 160 medical equipment providers located in the seven-county area covered by the area's competitive bidding program, Mr. Shirvinsky said.

One option for the out-of-state bid winners has been to subcontract their work to Pittsburgh-area vendors.

Georgie Blackburn, vice president of government relations for medical supplier Blackburn's, which is headquartered in Tarentum, said the company -- which won bids in two of the eight areas -- has turned down offers to subcontract on principle.

"No. 1, we don't believe in the health care policy so we're not going to facilitate it," she said. "No. 2, we don't want to represent someone else in our own area. ... We decided to grin and bear it and fight it to the n'th degree."

Ms. Blackburn has been lobbying against the program for years, and was down in Washington again last week continuing the fight. She has a pair of allies in Reps. Jason Altmire, D-McCandless, and Glenn Thompson, R-Centre. Both congressmen have a background in health care -- Mr. Altmire as a lobbyist for UPMC, Mr. Thompson as a nursing home administrator.

They co-sponsored a bill in the last Congress to kill the program, but it never got the support of the Democratic leadership. Mr. Thompson said he's hopeful a similar bill can catch the new Republican leadership's eye this year. Mr. Altmire said he would be willing to propose a new bill, but he's angling for a more immediate solution.

"At minimum we would hope CMS at the end would consider our arguments and say we're not going to move forward with any more competitive bidding" beyond this first round of sites, he said.

"That would be a last resort. But hopefully they would re-evaluate right now and say ... it didn't work out the way we said it would."

A major obstacle is how good saving $17 billion looks on paper and the lack of immediate outcry from patients. The latter has been the case in Pittsburgh for a few reasons.

First, the program's reach is limited because it doesn't apply to Medicare Advantage beneficiaries, who get their benefits through private insurers rather than traditional fee-for-service Medicare. More than half of beneficiaries in the Pittsburgh area have advantage plans -- the highest proportion in the country.

Also, CMS allowed patients to be "grandfathered" into the new bidding program, so they wouldn't have to switch medical equipment providers in the middle of an existing contract. Ms. Blackburn said this puts an additional squeeze on providers by forcing the lower billing rates on them, while the patient sees no difference in customer service, thus reducing the probability of complaints.

But eventually, the program's foes argue, customer service will decline and prices will rise again when reduced competition leads toward a monopoly.

CMS maintains there is no risk of monopoly because there are several providers for each device in each area -- and 30 percent of those must be small businesses.

Ms. Blackburn said she hopes her business can "stay afloat" while pursuing a legislative remedy. A key to any bill eliminating the competitive bidding program would be finding another way to get the promised $17 billion in savings.

She said the device industry would be willing to have some "skin in the game" to wring some savings out of the sector, but she said margins are thin already after medical devices were hit with an across-the-board 9.5 percent cut in billing rates in 2008.

"We have more than paid back enough to the government, and we feel there are other areas where we can gain some offsets," she said. "We have taken a lot of hits."

She pleaded her case to a room overflowing with notebook-wielding congressional staffers Tuesday morning in a House of Representatives office building. Ms. Blackburn and other industry advocates -- including Mr. Shirvinsky -- held a briefing, staged by Mr. Thompson and Mr. Altmire, to educate the staffers on the issue and drum up support for a bill to strike down the bidding program. A top CMS official also briefed the staffers.

The program is complex and convoluted -- Mr. Thompson described it, not admiringly, as "bureaucracy at its best" -- but the advocates hope that enough explanation will bring congressional weight to their corner.

"We don't do this kind of event enough," Mr. Thompson said as he left the meeting.

"You need people with content expertise here. And, frankly, [Mr. Altmire] and I both come out of related industries so we understand this, and it's our responsibility to help our colleagues understand it as well."


Daniel Malloy: dmalloy@post-gazette.com or 1-202-445-9980. Follow him on Twitter at PG_in_DC.


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