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Critics take issue with Medicare bid program

Economists and trade groups are shifting into high gear in their years-long fight against a controversial Medicare bidding process that they say is overrun with operational problems but that federal officials adamantly argue is effective.

The Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Competitive Bidding Program — which applies to items patients use at home, such as diabetes tests and power wheelchairs — has been criticized for what many believe is a flawed auction structure and lack of transparency since it was approved by Congress a decade ago.

But as a key deadline for the second, expanded round of bidding approaches, critics — led by the American Association for Homecare — have zeroed in on what they say is another egregious flaw: Winning bidders include companies who aren’t licensed to distribute in states where they have won contracts, including more than 100 suppliers in Maryland.

That’s a violation of the program rules, set by the Centers for Medicare and Medicaid Services, which say companies must comply with licensing requirements where applicable. In at least 18 states, including Maryland, DMEPOS suppliers must be licensed distributors.

“The system is broken,” said Jay Witter, vice president of government affairs for the American Association for Homecare, which represents suppliers. “If there was transparency, if everyone knew what was going on, this licensure violation probably wouldn’t have happened. If we had info from CMS a year ago about these bidders, they could have either gotten the proper license or their bids would not have been calculated. The system needs to be halted and changed.”

A CMS spokeswoman did not confirm that non-licensed companies were awarded contracts, but CMS has extended the deadline for companies to comply with licensing requirements until July 1, when suppliers and prices chosen during this bidding round will go into effect.

A spokeswoman for Maryland’s Office of Health Care Quality, which is responsible for issuing Residential Service Agency licenses to Medicare homecare suppliers, said the office will work with the companies that aren’t yet licensed to help them comply by the deadline.

But critics of the program are not satisfied. First and foremost, Witter and others are calling on CMS to throw out bids by non-licensed companies, but they’re also trying to derail the program’s expansion altogether until the bidding structure — which many economists say is deeply flawed — is reformed.

The bidding program replaces the fee schedule that previously determined prices Medicare would pay for equipment. Under the new auction system, CMS officials select winning companies and then set prices at the median of all submitted bids. CMS officials say it’s a competitive process that helps bring Medicare spending under control by driving down prices for supplies.

At least 244 economists from across the country, however, do not agree.

That group, which includes several experts from Maryland universities, wrote several letters to lawmakers and President Obama imploring CMS be forced to change its system.

“The auction design they’re using is completely non-standard, and there’s no reason to believe it would produce efficient outcomes,” said Lawrence M. Ausubel, an economics professor at the University of Maryland, College Park, who signed the letters. “They’re using an approach that experts in the area think is ludicrous.”

Under the CMS structure, bids aren’t binding — meaning winners can renege on the deal with no penalty. That incentivizes low-balling, Ausubel said. Companies bid low to have the best chance of getting on the list, but if the median price is unsatisfactory, they can simply turn the offer down.

“In Auctions 101, one of the basic principles is that bids need to be binding commitments,” Ausubel said.

Witter said including bids from non-licensed companies in those calculations further perverts the process and that failing to enforce the rules — which required licenses to be in place by March 2012 — is unfair to companies that did comply.

“I know of a number of companies that would have submitted a bid but knew they couldn’t get a license in time, so they didn’t,” he said.

Though the program was created in 2003, implementation was delayed due to earlier — and similar — criticisms. The program kicked off its first round in 2011 in nine bidding locations nationwide. Round 2 of the program covers 91 geographic areas, and Witter said the licensing issue isn’t limited to Maryland. AAHomecare believes there are violations in all 18 states with licensure rules and is working to confirm those cases, Witter said.

CMS officials, however, stand by the program, and suggested the licensing issue has been blown out of proportion.

The homecare associations could be aggressively targeting the program because homecare suppliers are upset about the bidding process driving down prices for their products.

CMS estimates that prices set during Round 2 for certain medical items are an average of 45 percent lower than prices paid under the former fee schedule. Between 2013 and 2022, CMS projects the program will save the Medicare Part B Trust Fund $25.7 billion and beneficiaries $17.1 billion.

“The reality is that the program is working well and saving consumers and taxpayers millions while preserving access to quality items from qualified suppliers,” CMS spokeswoman Tami Holzman said. “We are closely monitoring the program and have had very few beneficiary complaints.”

But Ausubel said the associations are correct to oppose the program.

“Anything they’re saying the program is saving, millions of dollars or whatever, is really a made-up number. CMS could be using a different auction process where the bid would have some connection with reality, and we’d have some confidence that where costs are getting reduced, it’s something real.”

Witter said the consequences of CMS’ “completely flawed” bidding system are at odds with the goal of home care.

“The whole idea of [home medical equipment] is to take patients out of expensive hospitals and nursing homes and treat them at home, which has significant cost savings,” Witter said. “And now this bidding program is going to disrupt a system that truly saves Medicare money.”