Competitive bidding and Medicare: Hard to mix

In a July 2011 paper in the Journal of Health Politics, Policy and Law, Robert Coulam, Roger Feldman, and Bryan Dowd make the case for competitive bidding (or competitive pricing) in Medicare. They also explain why it’s so darn hard for the program to adopt it.

First, recognize that competitive bidding is a standard method of government procurement. It’s also how one typically selects a contractor for work on one’s home or, often, how one selects a shop for work on one’s car. For a defined good or service, bids are solicited from qualified entities. Those bid amounts then inform how much the government, or you, pay for the good or service. Sometimes this means the lowest bid wins and only one entity gets the job. (Only one painting company paints your house.) Sometimes this means the lowest bid (or the average bid, or some function of the bids) sets the rate for all willing, qualified sellers. For example, the government will buy any hotel room for official government business, but only if it is below a specified rate.*

The authors write that competitive bidding is common among many publicly financed health programs.

Competitive approaches are used by most state Medicaid programs, the Veterans Administration (for instance, for basic oxygen and much DME), the Defense Department (for the large and complex TRICARE solicitations), the Federal Employees Health Benefit Program (to select health plans for federal employees around the country), and the employee health benefit programs of many state governments.

All these government programs employ competitive bidding to enlist market competition to drive prices lower. That’s good, right? We should be doing a lot of that, right? Market competition is the hallmark of capitalism and the American way, right? Well, when it comes to Medicare, not so much.

Coulam, Feldman, and Dowd quote Bruce Vladeck, former CMS administrator, and Barbara Cooper who wrote that Medicare has become a “provider entitlement system.” For much of what the program buys, prices are set according to administrative rules, not a competitive process. It should not be surprising that providers (hospitals, drug and medical equipment manufacturers, physician groups, insurers and the like) have influenced those prices, distorting them away from what they would be in a competitive market. As Robert Reischauer, former director of the CBO, is quoted, “There is really no political constituency for competition.”

What, then, would bring more competitive bidding to Medicare and in particular to the prices paid to Medicare Advantage plans? The authors make some concrete suggestions: divide provider opposition or buy it off (i.e., pay more, at least initially, and then adjust downward), avoid exclusion (i.e., allow high bidders to participate, albeit at the competitively set payment rate), cultivate political support (tautological but necessary), compensate losers (at least during a transition period; similar to buying off opposition), phase it in (providers and beneficiaries need time to adjust), strengthen CMS’s administrative and legal resources (many efforts at competitive bidding failed due, in part, to insufficient commitment in these areas), narrow the grounds for challenge through statutory language, combine competitive bidding with quality increases.

Finally, the most compelling reason competitive bidding’s time might have arrived is that it can play a constructive role in deficit reduction. Spending more of taxpayers’ money for the same product never makes fiscal sense. That’s true now more than ever.

I’ll post more on the content of Coulam, Feldman, and Dowd in the next two days. You’ll find more on competitive bidding for Medicare Advantage in the FAQ.

* I actually don’t know if government room rates are informed by explicit bids or just set by an administrative process. So, consider this just a hypothetical example.

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