Wheelchair opportunity to bend health cost curve in Medicare– Govt pays rates 4X the open market

Sep 3, 2009

Gold Plated Wheelchairs

Does low administrative cost or pooled purchasing lead you to the best values? When it comes to government purchasing, the results are surprisingly bad– the Medicare fee schedule rate for medical supplies can multiples higher than the cash price an individual can command. HHS’s Inspector General, Daniel Levinson, gives us the shocking details in his report on Power Wheelchair Acquisition Costs for the Medicare program (via CNN.com)

The Executive Summary is a fascinating rebuke of Congress’ ability to remove pork from the Medicare program, driving up costs for both taxpayers and beneficiaries. It also is a cry for help for a Medicare Administrator to take the steps required to appropriately run the government’s payor– we’ve missed the leadership a Mark McClellan can provide in the role (there hasn’t been a Senate-confirmed Medicare head since 2006). Is this the future of a govenment plan focused on minimizing administration?

Medicare’s fee schedule amounts are based on manufacturer-suggested retail prices. They include reimbursement for the power wheelchair acquisition cost and services performed in conjunction with providing the wheelchair, such as assembling and delivering it and educating the beneficiary about its use. Prior Office of Inspector General (OIG) reviews have found that consumers can buy power wheelchairs for lower prices than Medicare and its beneficiaries. In May 2006, the Centers for Medicare & Medicaid Services (CMS) proposed a revised methodology for setting new fee schedule amounts that would not rely upon manufacturer-suggested retail prices and is responsive to the market. As of May 2009, CMS had not finalized this proposal.

CMS planned to use supplier-submitted competitive bids to establish reimbursement amounts for power wheelchairs and other durable medical equipment (DME), beginning in July 2008. Medicare and beneficiary payments under the Competitive Bidding Acquisition Program would have decreased by an average of 26 percent across all included categories of DME, saving up to an estimated $1 billion annually. However, Congress delayed the program and exempted complex rehabilitation power wheelchairs from future competitive bidding. To offset the cost savings lost by this delay, fee schedule amounts were reduced in January 2009 by 9.5 percent.

Medicare allowed an average of $4,018 for standard power wheelchairs that cost suppliers an average of $1,048 in the first half of 2007. Medicare and its beneficiaries paid almost four times the average amount paid by suppliers to acquire standard power wheelchairs during the first half of 2007. The beneficiary’s copayment ($804) covered 77 percent of suppliers’ average acquisition cost.

Medicare Pays 4X market rate for wheelchairs

In English, we’re paying based on a MSRP rate, that, like any sticker price is stuffed with a high profit margin. In this case, comparing the lowest internet cost available to consumers in the category with 75% of the purchases was enlightening– the low price via the internet of $1452 was well under the average price (in a space where retail price competition doesn’t matter) of $2959 and the average government reimbursement of $4024. In fact, in a world where we move to the efficient supplier, we need much less insurance…the price isn’t dramatically higher than the out-of-pocket being paid today.

Medicare is classicly setting paper tigers on its path to reform. The opportunity is not to transition from an extremely high cost to the average cost that consumers can already find today. The goal needs to be to use volume to drive below the lowest retail price available to the consumer– around 50% of the cost of the average purchase today (in an environment where no one shops for price). There are big dollars that can be saved by moving to the most efficient intermediaries. Even simple transparency tools would allow consumers to save hundreds of dollars and drive massive volume differences to the efficient players. Imagine the WalMart effect spreading to other health care purchases.

Gandhi was quoted as saying, “Be the change you would see in the world.” As President Obama looks to transform health care, perhaps he should start with the government agency he already controls, which should then make the benefits of moving to that model clear to the rest of us.