The HME industry’s replacement for competitive bidding
by Cara Bachenheimer
December 28, 2011

After many years of rigorous efforts to repeal the Medicare DME competitive bidding program, it has become painfully apparent that Congress lacks the will to end the program. Industry leaders — including the American Association for Homecare, VGM, the MED Group, NAIMES, CSI and state associations — have therefore developed a constructive alternative. It is built upon a model created by a group of 244 economists. Industry leaders modified that model to better accommodate smaller providers and preserve their ability to compete. This is an explanation of the industry’s legislative proposal, “The Medicare DMEPOS Market Pricing Program Act of 2011.”

The proposed legislation would replace the Medicare DMEPOS competitive bidding program with a market pricing program (MPP) based upon economic principles that are embraced by hundreds of economists who are auction experts. (Economists use the term “auction” interchangeably with “competitive bidding.”) The market pricing program would be implemented on the same timetable and apply to the same DMEPOS product categories as the existing competitive bidding program. MPP is intended to be budget neutral. 

Expert Design and Monitoring

Under the proposal, the secretary of the federal Department of Health and Human Services (HHS) would contract with an experienced and independent auction expert to design and implement the MPP, and an experienced and independent market monitor to ensure the program’s operational integrity. The auction expert would develop a draft auction design, and the HHS secretary and auction expert would convene a design conference. It would include all stakeholders, including Medicare and other federal authorities, DMEPOS suppliers, beneficiaries and the DMEPOS Competitive Bidding Program Advisory and Oversight Committee. The conference would be recorded and available through the Internet, and the HHS secretary and auction expert would publish the final MPP design. There would be an appeals process for providers.

To assure MPP transparency, the following information would be publicly available:
• All financial and other qualifications for bidders
• Eligible market areas and categories to be auctioned
• Protocols and timing for the auction
• Methodology for setting prices or transferring those prices to other areas outside the auction

Auctions would begin by March 1, 2013, and consist of multiple rounds of bidding. They would establish “clearing prices” based upon supply from DMEPOS providers meeting demand or expected utilization. (For more details on how the auctions would operate, visit economist Peter Cramton’s website at www.cramton.umd.edlu/papers/health-care.)

Notably, auctions could be conducted within months of a “go live” date, compared to the existing program where bids are submitted a year and a half prior to an effective date.

Critical Features of MPP

Instead of auctioning all product categories in a particular bid area, no more than two product categories would be auctioned for exclusive contracts in a single area. The remaining nonauctioned product categories would be provided by any qualified and willing supplier at clearing prices determined from auctions conducted in other, economically similar areas. Therefore, if a provider lost both auctioned product categories in an area, the provider would still be able to provide the remaining bid products, at prices determined by other auctions.

Bid areas would be called market areas and defined as a city, county or aggregation of counties. The market areas could be smaller than bid areas now used that are based on Metropolitan Statistical Areas. The auction expert would have authority to set the size of market areas to accommodate the needs of smaller providers.

Products Included in Auctions and Prices

To achieve budget neutrality, the proposal includes the same products that Medicare has chosen for the existing program, with limited exceptions. Included are: oxygen, standard power wheelchairs, manual wheelchairs, enteral nutrients, CPAP, hospital beds, walkers, diabetic supplies, negative pressure wound therapy and support surfaces (Group 2). Medicare would retain its authority to create additional categories, but could not bid complex rehab items, including adjustable skin protection cushions for wheelchairs, complex rehabilitative power wheelchairs and complex manual wheelchairs (HCPCS K0005 and E1161).

Under the existing program, the product price is set by the median of bids submitted by contract winners. That means some contractors get paid less than their bid. Under MPP, no contractor is paid less than what they bid.

The bid process would be simplified because only the “lead product” in a category would be auctioned. The auction expert would determine the lead product—typically the most highly utilized/paid item in the category. Prices for other products in the same category would be proportionately referenced to the lead product price through a process designed by the auction expert with input from stakeholders.
The clearing price of the lead product would be based upon expected utilization of a product and the number of low bids needed to reach that demand. The point at which the capacity of low bidders reaches demand would be the clearing price. All winning bidders would have to accept a two-year contract at that price, which would be at or above their bids.

Medicare and the auction expert would use models to extrapolate prices for all market areas included in MPP. They would select a sufficient sampling of market areas for auction that would establish valid nationwide prices. The first auction would cover a sample of at least 20 percent of the country and include a variety of geographic and socioeconomic areas, and succeeding annual auctions would cover a sample of at least 10 percent of the country.

Prices would be effective July 1, 2013, and each July 1 of succeeding years.
The capacity of each bidder would be based upon a bidder history. Suppliers new to the market or without a history would be assigned a standard base capacity of 1 percent market share. To assure that only serious bidders participate, each would be required to deposit cash or an irrevocable letter of credit bid bond. These deposits would be returned to unsuccessful bidders and retained for the successful bidders as a guarantee of performance.

Market Monitor Provides Oversight

The market monitor would evaluate the design, implementation and functioning of the MPP to identify weaknesses or problems. The monitor would report to the HHS secretary and recommend adjustments and changes. The monitor would have access to confidential information.

The market monitor would also review and report on the draft and final auction designs and participate in and report on the designs and design conference. The monitor would assess supplier performance and beneficiary experience to assure that beneficiaries have access to quality products and services. Finally, the market monitor would provide an annual report to Congress.

Competitive Bidding Would Stop

The Round 1 contracts and prices would continue through June 30, 2013, and terminate six months early with MPP pricing. In the nine Round 1 bid areas, Medicare would offer contracts to DMEPOS suppliers that submitted bids for product categories but had rejected them solely because of price considerations. Bidders accepting these contracts would also have to accept prices established through MPP. Medicare would stop implementing Round 2 of competitive bidding.

HomeCare, January 2012