Great blog. I enjoy reading it every chance I get and value your opinions!

Free market and Reforms are two seperate subjects. A reform such as the one presented is a limitation of competitors in a market. A free market has no limitations. By even the most generic definition of economics a market with

less competitors (91% and 83% as per above examples) means that even if prices are guaranteed for 3 years to be this reduced price, the likelehood of increasingly higher bids due to decreased volume at the factory level will cause significant cost increases across the board. Imagine if you will that the factory producing those supplies gets 1/10 the orders of normal (this is based on full implementation in all 260 planned areas not just these initial 10). They will have decreased ability to produce those items in massive volume, decreased ability to purchase the original plastics or other items, decreased employees to produce those items. This will just create a market that eventually will be so expensive you might as well just raise the price across the board. And since a free market requires increasing amounts of competitors to keep costs down, any program that locks out all new providers for three years until the next bidding zone will actually reduce the volume of activity for these items, thereby increasing the price at the firm (production facility level). They will then have to charge more for the supplies to the company which in turn will have to bill Medicare more money on competitive bid rather than less due to an increase in basic costs. The most effective way to handle this is to make sure that everyone meets the accreditation requirements and bid requirements and leave it at that. This is relatively simple and basic economics. Whether this information has been reviewed or not is questionable.

Admittedly any government reimbursement schedule that injects the judgments of bureaucrats for market forces is likely to be flawed, as the current reimbursement schedule for DME is. However, one is hardly likely to arrive at a more perfect competitive result by forcing competitors out of a growing marketplace and erecting an absolute barrier to the entrance of new competitors, as this program does.

The reality is that this program is not competitive at all. In fact, it is a very odd variation of traditional and successful competitive bidding programs in some very important respects. First, successful competitive bidding programs tend to deal with single units that are very well defined in terms of quality and quantity. The CMS program dealt with literally hundreds of items; there were no quality specifications for any of the items; and bidders were left to guess as to how many of any given product that they would actually be supplying if successful. That would be the equivalent of a highway department putting out a bid to “fix the roads” rather than specifying which road, the number of lanes, the number of miles to be repaired and the materials to be used. In other words, the information that one would normally find necessary in order to formulate a responsible bid.

Secondly, in most successful competitive bidding programs the competitors are large concerns that tend to compete among one another for large contract awards. The CMS bidding program was nothing short of market manipulation by the largest purchaser of DME and supplies in the world. Here it is seeking to price products so low that only a handful of companies will survive and force all others out of the market. This is an activity that, if attempted by large private competitors, would be prosecuted by the Justice Department for anti-trust violations. Moreover, the CMS program is not aimed at a handful of large concerns, but at thousands of small and independently owned business concerns that service relatively small local markets.

This is a good place to point out that the consumers of DME are chiefly the elderly, the infirmed and the disabled. The DME products supplied are often vital components of their healthcare. These consumers are looking for products and services that are of a high quality (it is healthcare), with good service and in relatively close proximity to their homes. It is not much different from the way that most of us choose our physician or dentist. The CMS bidding program is certain to compromise quality, service and proximity for most consumers – hardly an ideal outcome.

Third, the bidding is taking place at the retail level. Small, local, independently owned retail operations are hardly in a position to guarantee product pricing for three full years under the best of circumstances – certainly not at the beginning of what is likely to be an inflationary period due to world oil prices.

Finally, consider some of the additional and on-going problems that CMS has refused to acknowledge or address in any meaningful way:

- An unbelievable 63 percent of bidders were disqualified for disputed technical reasons and CMS didn't think that was unusual.

- Medicare beneficiaries in Pittsburgh will lose their right to choose eight out of ten existing providers. A full 82 percent of the Pittsburgh area’s 289 DME providers will no longer be able to participate in the Medicare program for the items bid. In Miami that number is 91 percent. CMS believes that this will somehow help beneficiaries.

- Of the 52 companies that were offered contracts to participate in this program in Pittsburgh, 38 percent are from out of state with no current operations in the MSA. Some of those have little or no experience in providing the services for which they were offered contracts. CMS believes these companies will be able to get the job done simply because they signed a contract.

- It has yet to strike CMS as curious that 64 percent of contract offers went to the smallest companies (under $3.5 million) with the least competitive advantages. It was widely anticipated that the program was designed to favor the largest companies with the most sophisticated operations, best pricing based on volume and the motivation to seize market share in some of the nation’s largest MSAs. That’s why a 30% set-aside was created for small businesses that were at a significant competitive disadvantage. The actual outcome should cause someone to ask whether these small bid winners – many of whom do not have current operations in the MSA – will be able to provide quality products and services for a full three years.

Finally, on the matter of "fraud and abuse," at what point does CMS take responsibility for having granted provider ID numbers to fraudulent business operations? It has taken CMS years to finally accept the recommendation of legitimate DME suppliers to require accreditation as a prerequisite to participating in Medicare. It is a cheap shot at those companies that operate legitimately and within the law to paint an entire industry with so broad a brush. Who do you think provides the wheelchairs and oxygen equipment that you can find in use virtually anywhere you go? Criminals?

It disorienting to find Heritage siding with big-government bureaucrats against the private sector on matters of fundamental market economics. It is disheartening to see you take such cheap and unnecessary shots at legitimate and honest businesses.