Okay. Competitive bidding stinks, but what is appropriate pricing for HME?

I'll be honest: While I realize competitive bidding is a terribly flawed program, I have no idea what Medicare should pay for DME. Congress and CMS obviously don't know either. Neither, I'm sure, does 99.9% of the general public.

That's why, on the surface, for so many people bidding seems like a good way to determine pricing. (For an example of this mindset, check out this scathing commentary on the HME industry.) But if bidding's a terrible idea, how should pricing be set? How would the industry like to see this issue addressed? Let's face it, at some point, prices have to be set at such a level that good businesses thrive, bad business struggle or die, and Medicare and other payers don't feel like they are being gouged.

I don't know what that price point is, but I was thinking about this the other day. Then I remembered that years ago I had a long interview about competitive bidding with Tom Scully, the CMS administrator during the early years of the Bush Administration. Scully's long gone, but when it came to discussing fair pricing for DME, I thought he made some good points. Of course, he may have been blowing smoke, but I give him credit for sounding reasonable.

Here's the interview, which ran in the September 2002 issue of HME News:

WASHINGTON -- HME News interviewed CMS Administrator Tom Scully last month about national competitive bidding for durable medical equipment and related issues. As is his style, the second most powerful man in healthcare (according to a recent poll by Modern Healthcare), didn't mince words. He sees competitive bidding as the best way to achieve the lowest price possible for taxpayers. At the same time, he recognizes that the government has a responsibility to safeguard beneficiary access and assure a robust mix of small, medium and large providers. To find out how he might balance those competing interests, read on.
HME News: Do you favor competitive bidding?
Tom Scully: Yes. I was a little surprised that some folks in the industry seemed to take some comments I said to mean that I was against competitive bidding. What I've said all along is that if you are interested in markets, how can you be against competitive bidding or inherent reasonableness? We like competitive bidding, getting the lowest price possible for taxpayers. And how could you possibly be against taxpayers paying inherently reasonable prices? Conceptually, it is impossible to be against either one of them.
HME: If competitive bidding passes, would you be willing to work with the home medical equipment industry to craft the program?
Scully: Yes. Most of the industry realizes that inherent reasonableness and competitive bidding are more than just words. Instead of being just against them, the industry ought to figure out how to make them work. We'll all be a lot better off.
HME: What about industry fears that competitive bidding favors large companies over small?
Scully: What I've said is that if the government goes out and does not understand that in some cases it is 85% or 90% of the market, and isn't sensitive about using its market power appropriately, it can wipe out many small business and many providers, which is not a good thing. The issue is to find the right balance. The government has to be careful when getting into competitive bidding not to get the lowest price and wipe out all the little guys. It is easy in competitive bidding to have a big player come in and low ball the price and get the volume and come back and raise prices later. We need to say, 'How do we get the best price for taxpayers but make sure we keep a broad base of providers in the game at the same time.'
HME: How do you do that?
Scully: I haven't thought what our policy will be. But if Congress passes competitive bidding and we go into an area and do it for some type of DME,  the goal would be to have multiple suppliers and set up a structure where we'll have the best prices with reasonable margins for the long term. It is not in our interest to come in and find one guy to sell wheelchairs and one guy to sell hospital beds. And have the biggest player get the contract and wipe out everyone else. That doesn't mean competitive bidding is not going to work. You just have to be aware that when the government is the biggest player in the market, you can really screw things up if you don't' make sure you have a balanced approach.
HME: Word is that a final rule on inherent reasonable should be released soon. How do you feel about using inherent reasonableness?
Scully: How can anyone justify us not looking at the rates we are paying and say we shouldn't try and find out what the inherently reasonable rate is and pay it? It is counter intuitive. What they should be afraid of is us being heavy handed and using it inappropriately. Obviously, we are hoping not to do that.
HME: Do you prefer IR over competitive bidding?
Scully: I don't like being a price fixer. We would rather have a competitive program for everything. But given that Congress has given us direction to set prices, we have a responsibility to taxpayers to figure out what the right prices are that give people reasonable margins and still make government contracting an attractive business.
HME: How do you define 'attractive'?
Scully: My goal is to make Medicare a balanced, reasonable payer, where people can make fair, decent boring margins. It shouldn't be a cash cow."
HME: Are your talking single digit margins?
Scully: I don't know. Margins are hard to measure. But we need to do the best we can to come up with the best payer rates for taxpayers. It is also in our long term interest to keep good solid providers --  large and small -- in business.
HME: What do you think about the industry study that states CMS would have to hire an additional 1,626 employees to implement and run a national competitive bidding?
Scully: That is outrageous garbage. Just silly. I don't know who cooked that up but they should be embarrassed. I used to run a trade association. I used to cook up silly arguments. The bottomline is that if we do competitive bidding, and we do it right, some of our contractors and carriers will have to hire more people to carry it out. But we are not going to spend nearly as much money as we will theoretically save. If that were the case, we wouldn't do it.
HME: Based your limited demonstration projects, can you really say competitive bidding will save Medicare money? The data hasn't even been analyzed yet.
Scully: I don't' think either one of those demonstration projects were perfectly structured. But there is no question we will save money. Whether it is right or not for the House bill, the CBO said competitive bidding would save $7 billion over 10 years. Whether it will save that much or not, I don't know. But I've been around the business long enough to realize that there are plenty of places competitive bidding can save money.
HME: CMS seems fixated on the DME industry. Aren't there place to reduce reimbursement in Medicare's other provider groups?
Scully: The squeeze has already come on the biggest parts of the program. We've spend the last 20 years squeezing hospitals, the biggest part of the program. We've spend a lot of time the last 10 years squeezing doctors. Nursing homes took a beating a few years back. DME is a relatively small pot and has gotten relatively less attention, and I think it is starting to get more. There are certainly places for efficiency in DME. Any one who tells you there are not is not being straight.
HME: How do you create a national competitive bidding program that doesn't favor companies willing to cut corners to shave costs?
Scully: Our job is to set the right incentive for people to behave reasonably and for honest people to make a reasonable return on their investments. We need to make sure that every senior who needs one has access to a wheelchair a scooter or whatever. But it is not in the program's interest to set up incentives where every person in the country who can't think of anything else to do is incentivized to go out and sell medical equipment.
HME: What kind of standards do you have in mind?
Scully: If competitive bidding does into the final bill, we will spend a lot of time coming up with the most reasonable competitive bidding program that we can by taking the best of what we've found in the demonstrations and the best of what we've found talking to people on the outside.

Mike Moran