Competitive bidding is ubiquitous throughout government – particularly in health care. But how policymakers have handled competitive bidding for Durable Medical Equipment – including home oxygen – is a prime example of how not to operate. In fact, it’s a policy so poorly designed that it’s negatively impacting patients and businesses that provide life-sustaining care. It’s policies like these that force people to resort to hospital or ER care instead of the most cost-effective option of therapy at home.

Medicare’s competitive bidding process for home oxygen therapy is based on a methodology that doesn’t set the rate at the amount the market establishes – known as the clearing price – but at a median rate. A median rate means that half of the suppliers wishing to participate are required to accept rates below their bid. This has resulted in some suppliers jumping ship instead of taking a loss when they can’t cover the costs of the service.

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Even more troubling, the current requirements don’t distinguish between experienced suppliers who understand the local patient population and costs and suppliers who have never provided said services in the area. Thus, a provider in Maine can submit a bid in Ohio even though it has no employees, facilities, certifications or other requirements in that state.

Some bidders submit low bids knowing that if they win and the price set by Medicare is too low, they will simply do nothing to serve the market. They are commonly called “suicide bidders.” When experienced suppliers win a contract, they are left with a price so low, that many end up not being able to sustain care. The effect of these suicide bidders on price has been devastating to the remaining market providers. For example, oxygen therapy price has declined by more than 50 percent and sleep apnea therapy price declined 60 percent when compared to the original fee schedule.

The second effect is an expected byproduct: an increase in the number of providers who can’t afford to stay in business. The number of home oxygen providers declined from nearly 18,000 in 2008 (the first year of competitive bidding) to an estimated 6,000 at the beginning of 2017. By the end of the year, the number is expected to fall even lower, to an estimated 4,000. Troublingly, when these providers exited the market, most just closed their doors, abandoning patients. When a supplier tries to help an abandoned patient, bureaucratic rules get in the way. For example, a supplier seeking to take over care for an abandoned patient must obtain the patient’s original medical records documenting the medical need for the equipment. Suppliers who have left the market often don’t transfer files. Even when the records created by the physician are available, they are usually insufficient, requiring a patient to return to the doctor, which incurs additional costs. Because of these arcane rules, the reality is that fewer than 50 percent of the abandoned patients are reinstated and requalified by remaining suppliers.

The end result is that patients are finding it more difficult to access the treatments they need. According to Medicare’s data, the number of oxygen rental patients declined by 33 percent between 2008 and 2014, while the number of COPD diagnoses increased by 59 percent. Because the only treatment for COPD in its later stages is home oxygen therapy, the increase in diagnosis and the decrease in patients using the services suggests that patients aren’t getting access to the care necessary to remain at home.

The final question: how does competitive bidding, which has lowered the price of services by 50 percent or more, lead to higher costs? It is simple. A patient with oxygen therapy in the home costs Medicare roughly $3 per day. When they are abandoned by a provider, their condition usually deteriorates resulting in a return to the ER, which can cost upwards of $1,000 per day. DME represents only 2 percent of the total Medicare spending, while hospitals make up approximately 40 percent. Ultimately, there is an increased expense for taxpayers.

To fix this problem, Medicare should do two things. First, the extension of urban competitive bidding rates to rural areas must be halted. The administration is currently considering an “Interim Final Rule” (IFR), which would reinstate a transitional rate that sets rates in non-competitive bidding areas at 50 percent of the old rate, and 50 percent of the competitive bidding rate. While not the ultimate solution, this IFR would stabilize the marketplace and begin to reverse the problems for patients.

Second, Medicare should reform how it determines the competitive bidding rate. Currently, it uses an arcane methodology unlike any other used, and distorts the bidding process. It’s critical that the federal government seek constructive input from the industry on the bidding process in order to allow the marketplace to work as it should. These changes need to be implemented before the next round of competitive bidding.

Competitive bidding exists in all areas of the government because, in many cases, it works. But where it doesn’t, as is the case with home oxygen, policymakers must step in to fix it.

Timothy Pigg is a Council for Quality Respiratory Car (CQRC) Board of Directors Member and CEO of Rotech Healthcare Inc. The CQRC is a coalition of the nation's seven leading home oxygen therapy provider and manufacturing companies.