Why Can’t Patients Get Paid for Saving the System Money?

Back in 2008, I met Michael Leavitt in his capacity as U.S. Secretary of Health and Human Services for President George W. Bush. Secretary Leavitt was trying to implement a new way for Medicare to buy some medical supplies, categorized as durable medical equipment (DME), through competitive bidding.

At the time, DME was bought using the same, Soviet-style fixed-fee schedules that Medicare uses for doctors and hospitals today. Competitive bidding for DME had actually been legislated in the Medicare Modernization Act of 2003. In 2014, we know that competitive bidding has saved hundreds of millions of dollars.

However, five years after the law was signed, it was still struggling to launch. The reason is not hard to discover. The initial round of bidding in 2008 resulted in prices about half of the prices which had prevailed before for power wheelchairs, electrical hospital beds and diabetic test strips. Obviously, many inefficient suppliers who had profited under the prior regime were shut out of the newly competitive market and did what businesses in the health care industry tend to do in such situations: They went to their politicians to acquire legislation that would protect them, and the program was kicked out of bounds for a few more years.

Competitive bidding for DME finally took place in 2011 — eight years after being legislated. A 2014 report by the Government Accountability Office determined that competitive bidding saved Medicare $400 million in 2011 and 2012, reduced inappropriate use of some equipment by over one fifth and did not harm patients’ access to the equipment they needed.

Of course, the suppliers which would prefer not to compete under this system continue to lobby for protection. Competitive bidding can be a blunt tool. As the program evolves, the Centers for Medicare & Medicaid Services (CMS) must be careful not to lump differentiated products in the same bucket and force commodity pricing on them. Nevertheless, there was no significant uprising by Medicare beneficiaries against competitive bidding for DME like there has been against Obamacare’s cuts to Medicare.

And yet, it took years for the Administration to overcome the suppliers’ lobby. Why? I suggest that it is because Medicare beneficiaries themselves did not share in the savings. Suppose that instead of CMS running the competitive bidding and sending the savings to the Treasury Department, the law had been written so that the Secretary could have given a press conference the same day the President signed the bill and said something like this:

“Folks, Medicare has been paying over $4,000 for your power wheelchairs. We know that they can be purchased for around $3,000, or even less in some parts of the country. So, you go find yourself a power wheelchair for less than $4,000, send me the invoice, and I’ll share the savings with you. I’ll add half the savings to your Social Security deposit as soon as we’ve verified the transaction.”

Does anyone doubt that America’s seniors would have jumped all over that deal? Competitive bidding for DME would have been a done deal within eight months (or maybe eight weeks), not eight years.

Giving patients a cut of the savings would motivate them to view third-party payers (whether government or private) as allies, not enemies who are always trying to ration care. And yet this obvious solution is forbidden almost throughout the health care enterprise.

For example, in Medicare Advantage, the program in which private insurers offer comprehensive Medicare coverage outside the government’s Soviet-style fixed-fee schedules, insurers lure beneficiaries by offering free fitness-club memberships and the like. I used to think that this was due to risk selection: The plans wanted the healthier seniors.

However, recent research has largely disqualified this explanation. Health insurers win Medicare Advantage contracts through competitive bidding; however, they cannot share the savings they achieve with beneficiaries directly. Instead, the “rebates” (which is the term used by CMS) must be given to beneficiaries as extra services. This likely explains why some research indicates that Medicare Advantage plans pass less than half the value they add on to beneficiaries.

Health insurers and employers in the private market are also restricted in their ability to enlist patients in saving money. The government imposes these restrictions because they conflict with a fundamental principle of Obamacare. I’ll discuss this further in next Monday’s Health Alert.

Comments (32)

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  1. Tom says:

    Let us not leave out big Pharma. I receive all kinds of coupons and “debit cards” for substantial savings on monthly cost for prescriptions. Many offer the patient to pay no more than $30.00 to 35.00 for their monthly Rx. This provides savings for many of $60.00 to 100.00.

    Medicare beneficiaries are barred from using these savings plans. Why? because thanks to Sen Pete Stark and his Draconian approach to healthcare savings, these are considered inducements to more expensive and unnecessary treatments.

    No consideration is given to the fact that these medications are preferable by physicians for their efficacy in controlling disease and disability because they are far superior to what the wizards at Medicare feel are the appropriate treatment modalities.

    • Devon Herrick says:

      My explanation is slightly different. Medicare Part D plans offer seniors lower cost-sharing through various inducements incorporated in plan design. Enrollees who opt for cheaper generic medications are rewarded with lower drug cost sharing. This is often most pronounced for those medications that are thought to have good generic substitutes. The concept is called gain-sharing (i.e. help the plan save money, it will help you save money).

      On the other hand, the drug company debit card only shares the gain with seniors — not the drug plan or Medicare. Medicare subsidized about 75% of the cost of senior drug plans. Seniors pay about one-quarter — but possibly less at the margin (i.e. the pharmacy counter). That is why the Stark Laws prohibit inducements that encourage seniors to chose options that could boost Medicare’s cost. This is true not just for drugs, but also DME, surgeries and all Medicare services. Can you imagine what would happen if a doctor advertised that all seniors that came in for a office visit and MRI this month would each receive $100 bill?

      • John R. Graham says:

        Thank you. The vouchers Ted describes do not lower the cost, but only shift it to the private insurer or government (if the latter were allowed).

  2. Ralph @ MediBid says:

    In 2007, DME is 1.7% of the total Medicare spend. So, if we can save $400 million a year on 1.7% of 25% by bidding on DME, imagine what we can save if we embraced bidding on elective medicacal care which is probably 20% of the total spend

  3. Dale E. Fuller, MD says:

    I like the idea of creating a “participatory market place” in which patients have some incentive to seek best available pricing of their durable medical equipment. It might be helpful start with a pilot project for one item, such as power wheel chairs and see over a specified period of time what outcomes can be achieved in terms of price,quality and access.
    As most people know, the VA buys pharmaceuticals on bid, and saves significant money. Part D would be an excellent place for a similar bid policy. But, PhARMA put a lot of money on the table to support passing of Obamacare in order that the bid process would not be used to acquire drugs for part D beneficiaries. That would have saved some significant amount of money, and should be revisited.

    • John R. Graham says:

      I was really thinking more of medical equipment, supplies, and hospital procedures. I’m not quite sure I understand your use of the word “bid”. The VA buys drugs according to prices fixed on the Federal Supply Schedule (FSS), which has contracts for OTC drugs, etc. However, for prescriptions, it demands the lowest price (“most-favored customer”). If this definition were expanded, most economists agree that prices would increase, because drug-makers would not cannibalize their other sales.

    • John Fembup says:

      Doctor, Its quite possible that “big pharma” recovers some of the money it appears to concede to the VA, by raising charges to other buyers – e.g., Medicare and private insurers.

      In that case the price negotiation for Medicare may be a lot more difficult than it was for VA. That’s because the opportunity to protect overall revenues by such cost-shifting would shrink significantly if Medicare achieved comparable pricing.

  4. Jeong Seo says:

    “Giving patients a cut of the savings would motivate them to view third-party payers (whether government or private) as allies, not enemies who are always trying to ration care.”

    Well said. What you are proposing is exactly the type of empowerment necessary to control monster expenditures.

  5. Big Truck Joe says:

    Competitve bidding is anti freedom of choice and thus un-American. So, we went from 1000 DME suppliers selling mail order diabetic supplies to 20. Reimbursement went from $35 a box to $11 and forced a lot of people out of business. So the govt reduced pay by two thirds and increased administrative paperwork. And CMS picked, in secret, the 20 suppliers who won Compettive Bidding. Why is it, in and of itself, that a lack of provider choice better for the patient and how does that “save” Medicare money? What happened to all those DME suppliers that are bankrupt or forced to lay off thousands of people? Those folks are now collecting unemployment insurance, probably costing nearly what CB supposedly saved, How many PHDs have done a study on that? Why not simply let all existing DME suppliers choose to offer at the new rates or not? The conspiratorialist in me thinks that it’s easier for the govt to control 20 suppliers versus 1000 and to hand out political favorites as the winners. Also Everybody likes to compare buying a wheelchair off the internet vs from a supplier. Anybody making that assertion has never worked in the paper hungry bureaucratic morass of medical billing and thus has no right to continue debate – and that includes our illustrious President who, as far as I can tell has never had a real job in the private sector where you actually had a Profit and Loss statement determining whether you had a job next month or not.

  6. Underwriterguy says:

    I once observed numerous “scooters” parked in a lower level of my father-in-law’s CCRC. When I asked why there weren’t being used, I was told that since Medicare paid for new ones there was no market and, therefore use, for a used one. These had belonged to residents who, for one reason or another, were no longer capable of using them. Why buy second hand when new is “free.”

  7. allan says:

    “I used to think that this was due to risk selection”

    You were not wrong at the time nor would you be wrong to say that risk selection probably still plays a big part.

    MA may have mitigated, but didn’t end the process of selection. If we remember the past mentioned by the authors of the study you referred to, Medicare HMO’s should have actually been paid about a third less than the were based upon risk. That is a large chunk of change so mitigation is good, but perhaps not good enough. However, even the proof involving mitigation is pretty thin.

    You are right about sharing the savings with the patient.

    • John R. Graham says:

      In my old age, I am no longer an “all or nothing” thinker!

      • allan says:

        Looking at your picture tells me you have a long way to go likely with many more changes. I hope they are the right ones.

        I won’t try to interpret what you meant in the statement that followed since it doesn’t seem to pertain to anything above.

        • John R. Graham says:

          I just meant that I think there is more than one factor explaining the outcome: Not all one or the other.

          With respect to the photo, I believe it is from the Clinton Administration.

          • allan says:

            That is generally true and yes, I agree with you, there were many factors though risk selection is a major consideration. I remember being guaranteed over and over again that the earlier Medicare HMO’s could not be turning a profit due to risk selection or denial of care because of the way the laws were written. Over a decade later that opinion was found to be wrong as were the studies that tried to ‘prove’ errant point.

            Adequate risk analysis at this time is far from accurate and can be easily manipulated so I don’t trust any studies like I didn’t trust the former studies that were proven wrong. One good thing about classical liberalism, if one keeps to their principles they will be right most of the times despite public opinion and university experts that use data like a paint brush to see whatever they wish to see.

            As far as your picture you still have a while to go though you won’t have as many chances to change as I thought earlier. 🙂

  8. Ralph @ MediBid says:

    Since when is competition unamerican?

  9. Bob Hertz says:

    Big Truck Joe is onto something, crankiness and all.

    Health care has been like a peaceful version of World War II for the American labor market over the last 20 years. As factory jobs have disappeared, due to outsourcing and productivity, a huge number of unproductive health care jobs have to some extent taken their place.

    This has been propping up the middle class. (see the articles by Michael Mandel, William Spence, and James Galbraith.)

    And when we cut medical costs, as someday we must, employment will shrink in the health field. Economically, we may find that the cure is worse than the disease.

    • John R. Graham says:

      Thank you. As I have written elsewhere, venture funding is stampeding in to digital heath, mobile health, et cetera. Where there is innovation there is always job growth. The purpose of the Medicare fee schedule should not be to guarantee jobs. People need to be ready for the future.

  10. Big Truck Joe says:

    “Competitve bidding is anti freedom of choice and thus un-American.”


    Allow myself to explain myself. In America we should have the freedom to choose which providers and suppliers we want to goto as long as they accept the Medicare fee schedule. In competitive bidding, a small group of secretive CMS administrators choose what 20 diabetic suppliers win – the rest are out of business. those who are over 65 years old and in Medicare should have the freedom to shop at whatever DMEs they want to buy their supplies from.

    • John Fembup says:

      “as long as they accept the Medicare fee schedule.”

      Seems to me that amounts to price controls,

      Do you really mean to say that government imposed price controls is what we should have in America . . . but that competition is not?

      • rex says:

        I think what joe is saying is that while some may argue that fee for service is soviet like, these same people fail to recognize that competitive bidding is nothing more than big buck crony capitalism. Just because big crony capitalists like Express Scripts preach competition does not in any way suggest that they would support competition. A high deductible catastrophic policy combined with an HSA should solve any problems associated with crony capitalism and soviet like fee for service.

        • Devon Herrick says:

          I agree with your idea that HSAs are the solution to price controls and crony capitalism. However, Medicare is an entitlement that taxpayers mostly fund. The program needs reformed in ways that inject incentives for seniors to watch the dollar. But until that happens, something needs to be done to reduce program expenditures.

          Whether a DME vendor wins the contract to be included in the exclusive vendor network should be based on a winning bid. Otherwise taxpayers are giving money away to uncompetitive entities. In theory, reference pricing might be a way for Medicare to allow small vendors to continue to participate. However, knowing where the reference price should be set is impossible without competitive bidding. Plus, if all firms were allowed to sell at the winning bidder’s price, the winning bidders wouldn’t have an incentive to big as low as they do when they know losing the bid means losing the business.

    • Devon Herrick says:

      I agree with John Fembup. The Medicare Fee Schedule is not composed of market clearing prices. Rather, it’s Medicare’s best guess about what the market prices. Of course, fee schedules become subject to lobbying and bogus analysis that claims the prices are set too low and more money is needed to provide adequate services. Neither can economists at CMS discover the appropriate fee schedule without competition signaling market-clearing prices.

      By contrast, competitive bidding is a way for CMS to find out how low DME suppliers are willing to bid. Granting the winning bidders exclusive access to Medicare enrollees, while shutting out the losing bidders, encourages bids to be low. Federal Trade Commission economists have argued this point on numerous occasions.

      It’s not in taxpayers’ best interest to think of Medicare as a big public trough that all DME suppliers have the right to gorge at.

      • John R. Graham says:

        What Mr. Big Truck Joe is describing is guaranteeing market share for every little competitor. Markets just don’t work that way. They usually end up with a few winners.

        But that does not persist. They get knocked out by new competitors with new ways of doing business.

        If we are going to advocate health reform that guarantees everyone who is earning revenue under the current system the same revenue under the new system, that is what the intellectuals call a “nothingburger”!

    • John R. Graham says:

      You are on the verge of gulling me into giving a whole-hearted endorsement of the DME competitive bidding – which I did not. The whole point of the article was that patients should benefit more directly.

      However, it is not “secretive administrators” who decides who wins – but the bidders themselves, but submitting the low bids.

  11. Don Levit says:

    Health insurers and employers in the private market are also restricted in their ability to enlist patients in saving money
    What fundamental principle of the ACA restricts health insurers and employers
    If you are referring to discrimination on an individual basis there is a way around that for the entire employee community to share equally in the savings in the self funded market
    Also there is a way for employees who negotiate lower prices than the network to not only share in the savings with the employer but also to have the entire lower negotiated rate credited toward their deductible
    Don Levit

    • John R. Graham says:

      Thank you. Yes, that is one item in our research agenda for this year: To better understand these regulatory restrictions and advocate repealing or reforming them.

  12. Big Truck Joe says:

    Both Peter Crampton PhD of the University of Maryland and Brian O’Roark of Robert Morris University studied and showed the deleterious impact that Compettive Bidding had on patient choice, quality of supplies, and the fact that there was a 90% reduction in the number of sellers of DME in the included MSAs in the 2008 bid ( a conservative estimate of elimination of 4,000 companies and 20,000 jobs lost). Dr. Cramton showed an alternative to CB in an all inclusive, binding open market Medicare auction system based on free market principles with more transparency of the process. Otherwise you get a crony capitalist situation where former felons like the Wolf of Wall Street Danny Porush and 5 other leaders of a FL based diabetic supplier are being imvestigated by OIG for False claims Act violations. Isn’t it intersting how a convicted boiler room felon makes significant donations to Democrat senators and presidential candidates and then his company, despite his fraudulent past, is one of 20 companies in the entire US to win a CB diabetic supplier contract. Now that’s UnAmerican.

    • John R. Graham says:

      I am a big fan of Prof. Crampton’s research and agree with is recommendations. The bidding system as currently designed is not perfect. However, it is better than what was before.

  13. bob hertz says:

    Several comments on this topic seem to prove my point that health care has been a refuge from the pressures of worldwide industrial competition.

    Selling toys to Walmart can be a ruthless process. For that matter, getting the bid to do janitorial work on a big office complex can be somewhat brutal.
    Salaries get slashed, many firms duck payroll taxes by calling their employees contractors, etc etc.

    Health care has been the place where everybody seems to make a decent living. I know that some hospitals have had layoffs, but minimally ccmpared to rust belt industries.

    In his book The World is Flat, Tom Friedman pointed out that we do not want a society in which everyone competes viciously on everything. We want to have some “friction”.

    Of course if everyone is protected, you eventually get a France or even a Greece where just sustaining a bloated and coddled labor force of public employees can bankrupt the state.

    Not sure where the happy medium is!!