The Magazine

A Disaster Waiting to Happen

Medicare bureaucrats wreck the medical ­equipment market.

Aug 15, 2011, Vol. 16, No. 45 • By ELI LEHRER
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All these features could cause major problems. Since bidders don’t have to honor their bids or prove they can meet them in the first place, they have enormous incentives to bid less than their actual costs, because doing so gives them a zero-risk option to sell to CMS at a price that may be higher than the bid anyway. Since CMS pays less than the likely-to-be-low “clearing price,” however, the system essentially guarantees that some will have to sell at a loss or drop out and thereby threaten their own survival. Finally, since nearly everything is kept secret, CMS’s own officials are free to manipulate contracts however they want. The result is a disaster waiting to happen for the market as a whole. 

In the trial areas, problems have already emerged. Diabetics have run into difficulty getting supplies that work with their testing meters and CMS has had to rejigger delivery quantities for almost every major item it has put out for bids. While these short-term fixes have prevented calamity, the fragile, nearly arbitrary process that now exists could show real strains as soon as the “round two” process expands current practices to a total of 91 metropolitan areas that collectively contain almost the entire population.

In fact, just about every independent study of the process makes decidedly dour predictions. One report from the Pacific Research Institute finds that CMS’s methods could reduce investment in medical device markets by as much as $3.1 billion over a 10-year period (essentially stopping the development of new high-tech devices) and cost $50 billion in terms of reduced life expectancy. Another report from the American Consumer Institute finds that the process’s consequences for one category of equipment—vacuum pumps that help heal serious wounds—would increase medical costs by $6.8 billion if it slows the technology’s rollout. “The CMS bidding process is so flawed that it will fail to find sustainable market prices for medical equipment,” says Steve Pociask, ACI’s chief economist and the study’s author. But CMS has given every indication it plans to push forward with the process unchanged.

And that’s where the bureaucratic interests come in. Since the process puts low prices above all other considerations, it will almost certainly produce savings of more than the 20 percent that experiments have shown, and its designers will look very smart. With only a few areas and a few classes of products in play, however, firms may have been willing to take losses up until now just to stay in the running. The people running the program at CMS probably hope they will emerge looking like geniuses who saved taxpayers billions, while the home care industry will get the blame as quality falls, shortages develop, deliveries become irregular, innovation ceases, and more people end up in hospitals. 

Cramton adds an important note. “It’s rare to see something like this happening in the absence of an organized interest group on the other side,” he told me. “Usually somebody benefits from the flaws in a process. Here, no special interest group benefits.” Unless, of course, one believes the CMS’s own leadership ought to be counted as another special interest group with an agenda all its own.

Eli Lehrer is vice president of the Heartland Institute.

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