$42 Billion: Medicare Finds Savings From Competitive Bidding

Our guest blogger is Lindsay Rosenthal, Special Assistant for Health Policy and Women’s Health and Rights at the Center for American Progress.

Last week, the Obama Administration announced that it would drastically scale up a program that uses competitive bidding to buy medical equipment for Medicare beneficiaries. The decision was made after the results of the first year of the competitive bidding program showed that competitive bidding saved $202 million in spending in 9 metropolitan areas, reducing Medicare expenditures on durable equipment by 42 percent, without sacrificing the quality of or access to care for Medicare beneficiaries. The Centers for Medicare and Medicaid Services (CMS) plans to expand the program to 100 metropolitan areas by 2013, and the entire country is expected to benefit from the program by 2016.

The savings in the first round of the competitive bidding program came from lowered prices for things like oxygen equipment, power wheelchairs, and mail-order test strips for people with diabetes. Instead of paying suppliers based on the current fee schedule that leaves Medicare paying prices well over market value, competitive bidding requires suppliers to compete for their contracts by offering better prices. The results of the first year of the program show that competitive bidding reduced the amount paid by Medicare for an oxygen concentrator from $2,079.72 per year to $1,393.92 per year and saved Medicare beneficiaries an average of $137 a year in cost sharing. Total savings on oxygen equipment alone during the first year of the program were over $59 million.

The savings that resulted from competitive bidding are no surprise— they’re matter of common sense and simple economics. As such, competitive bidding has enjoyed bipartisan support for quite some time. Yet this week’s announcement marks a hard-won victory for CMS, which has had a rocky time implementing competitive bidding against a lobby of suppliers invested in preserving the status quo.

Competitive bidding for durable medical equipment was first mandated as far back as 2003, with the passage of the Medicare Modernization Act. It was implemented in July 2008, but was only in progress for two weeks before all the contracts were terminated by a subsequent law supported by suppliers that delayed this reform. One of the primary concerns cited by suppliers was that small suppliers would be pushed out, unable to compete with larger companies. But the report released by CMS this week shows that approximately 51 percent of the suppliers who won bids were small suppliers.

Now that reform is under way, Medicare officials project that the competitive bidding program will save at least $42 billion over the next ten years, which is an important step in a larger effort towards reducing rising Medicare costs. Last year, the Center for American Progress proposed expanding competitive bidding in Medicare as part of a broader series of cost containment reforms that could save $100 billion or more in health care costs. We recommended not only requiring competitive bidding for all durable medical equipment, but also expanding the program to all medical devices and laboratory tests, among other products and services. Expanding the scope of the program to include medical devices, laboratory tests, and procedures such as outpatient radiological exams (like CT scans and MRIs) would increase the cost saving potential of competitive bidding, but would also require more technical expertise to implement. So CAP has proposed establishing a Medicare Competitive Bidding Committee, composed of individuals with private sector experience in acquisitions and experts in competitive bidding that would oversee the process to ensure preservation of quality and access.

Competitive bidding expansion and other payment and delivery system reforms are smart alternatives to the draconian Medicare cuts like those proposed by the Ryan Plan, which would shift the cost burden onto seniors and offer nothing in the way of meaningful reform for the healthcare system.