• 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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    • With or without competitive bidding, but particularly with competitive bidding, what stops providers from reducing costs by reducing quality of care? If market mechanisms like consumer choice need to play a role, how would consumers know there is a difference in quality of care, preferably before they become seriously ill?

      • Valid concerns. Answers may not be persuasive. They include: (1) quality monitoring and enforcement by government, (2) quality monitoring and reporting by non-government entities (e.g. Consumer Reports), (3) advertising by plans about the quality metrics (hopefully objective!) of competitors.

        Probably (1) is the first line and would likely be part of any legislation. (2) and (3) are more theoretical and might come in time. This quality assurance problem exists today. It’s not obvious to me it’s a bigger one in a more competitive environment. Competition on quality, not just price, is a way to grow market share and profits.

        • Then you believe that t (1) the government and private mechanisms that are currently in place to monitor quality are sufficiently sensitive to reveal any meaningful changes in quality and (2) that they would have detected any changes produced by the multiple examples of competitive bidding that Bob mentioned? Or would we need new and/or more intensive forms of quality monitoring?

          I am asking as someone who knows virtually nothing about how effective existing mechanisms are.

    • Comment 2 is right –this same quality assurance problem exists with or without competitive pricing. That is,with or without competitive pricing, plans will make more by reducing costs that reduce quality of care, if the quality reduction does not affect revenue. Competitive pricing eliminates the overpayment, not the incentive that is present in either event.

      There is no evidence to demonstrate that the introduction of competitive pricing reduces quality in any important way — and there are plenty of examples of competitive pricing to test the possibility.

    • Great article. I think one problem is that the SGR mechanism doesn’t provide physicians with much incentive to control costs–primarily since Congress continues to postpone scheduled reductions in physician reimbursement (e.g., Medicare and Medicaid Extenders Act of 2010). The SGR serves as a poor combination of self-regulation on the part of the physician services industry and a resource-based relative value scale that heavily favors capital-intensive specialty care medicine.