There is still room for statesmen in our government.

June 25, 2008

Economic Scene

High Medicare Costs, Courtesy of Congress

On Wal-Mart‘s Web site, you can buy a walker for $59.92. It is called the Carex Explorer, and it’s a typical walker: a few feet high, with four metal poles extending to the ground. The Explorer is one of the walkers covered by Medicare.

But Medicare and its beneficiaries aren’t paying $59.92 for the Explorer or any similar walker. In fact, they’re not paying anything close to it. They are paying about $110.

For years, Congress has set the price for walkers and various medical equipment, and it has consistently set them well above the market rate, effectively handing out a few hundred million dollars of corporate welfare every year to the equipment makers.

But as of July 1, this system is set to change. Companies will instead have to submit bids ”” to compete with one another, just as Wal-Mart competes with Target ”” if they want to continue selling products to Medicare. Based on a pilot program, the price of walkers, delivery and setup included, will fall to about $80.

Now, would you like to guess how the equipment makers feel about this?


With the changeover looming, they have increased their contributions to Congress. They have also started publicly claiming that competitive bidding will, among other things, deprive some patients of oxygen equipment they need.

The industry seems to be having some success, too. On Tuesday, the House overwhelmingly passed a sprawling Medicare bill that would throw out the initial bidding results. Pete Stark and John Dingell, two Democratic committee chairmen, and John Boehner, the House Republican leader, all pushed for the provision. The Senate will soon take up a similar bill.

This little fight deserves more attention than it’s been getting for two reasons. One, it’s a great example of how a small group of constituents can potentially beat back a policy that’s clearly in the public interest but has no similarly committed group of supporters. And, two, it shows just how difficult health care reform is going to be.

In the abstract, fixing the health care system sounds perfectly unobjectionable: it’s about reducing costs (and then being able to cover the uninsured) by getting rid of inefficiency and waste. In reality, though, almost every bit of waste benefits someone.

Doctors who perform spinal fusion surgeries, despite decidedly mixed evidence that they’re effective, are making a nice living. Hospitals that order $1,000 diagnostic tests, even when a cheaper one would work just as well, are helping their bottom line. Medical equipment makers selling walkers for $110, while Wal-Mart sells them for $60, are fattening their profits.

The current fight to protect those profits is a microcosm of what you can expect to see if a larger effort to rein in health costs ever gets going. The defenders of the status quo won’t say that they are protecting themselves. Instead, they’ll use the same arguments that the medical equipment makers are using ”” that a change will destroy jobs, bankrupt small businesses and, above all, harm patients.

“This is small compared to what broad health care reform would look like,” Kerry Weems, the top official at the agency that runs Medicare, told me, “and you can see the reaction.”

The current system of overpaying the manufacturers dates back to 1989, when Congress adopted a “fee schedule” for durable medical equipment and allowed any company to sell the equipment at the official price. Soon after, the fee schedule became a target of would-be budget cutters, including officials in Bill Clinton‘s administration and promarket Republicans like Representative Joe Barton of Texas.

This year, Medicare officials began accepting bids for 10 different products in 10 metropolitan areas. Starting with the low bidder and moving up the list ”” with a separate list for each product in each area ”” the officials selected enough companies to meet local demand and then some. The median bid among those winning companies became the final price. It was 26 percent lower on average than the current price, suggesting that competitive bidding could ultimately save Medicare $1 billion a year and patients $200 million or so in co-payments.

Unless the House bill becomes law ”” it would delay the start of any new bidding program for 18 months ”” the system will spread to 70 more areas next year.

So what about the equipment makers’ various complaints?

On close inspection, they’re pretty flimsy. My favorite is the notion that the new rule will force some companies to go out of business ”” which, indeed, it may. That’s sort of the point. After all, should taxpayers really be propping up any equipment makers whose survival depends on artificially inflated prices?

The most sensational charge is that a reduction in the number of suppliers will leave patients without access to oxygen machines, wheelchairs and other equipment. Certainly, Medicare will have to keep an eye on this. But remember that the government will still require that each metropolitan area have numerous suppliers for every product.

In fact, the Government Accountability Office, a federal watchdog, examined two early bidding programs from a few years ago and found that they didn’t reduce access in any significant way. AARP, similarly, has said it didn’t hear complaints from its members, and it supports the bidding program.

On the telephone the other day, Cara Bachenheimer ”” the senior vice president for government relations at Invacare, which makes walkers, beds and the like ”” laid out her company’s criticisms. Many of them relate to the program’s bureaucratic imperfections. So I asked her what kind of bidding system Invacare would support, and she replied that she didn’t think there was such a system.

“I’m not sure I would argue the system needs to be radically changed,” Ms. Bachenheimer said.

That’s really the nub of what’s going on here. A small number of companies, including Invacare, Pride, Praxair and the Scooter Store, want to keep the billion-dollar subsidy that they’re receiving every year. Or at least they want to keep as much of it as possible ”” which explains their strong support for the current House bill, even though it includes a 10 percent fee reduction. They recognize that the alternative ”” competition ”” would be worse for them

The industry has been able to win over some Congress members by warning of job losses. Other members are naturally ”” and, in some cases, rightly ”” skeptical of the workings of the free market.

But this is a case in which the market can clearly do a better job than a government-mandated fee schedule. Just look at Wal-Mart’s Web site or, for that matter, the bids that Medicare has already received.

By standing in the way of this competition, Congress is really standing up for higher health care

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