Saturday, March 09, 2013

Achieving Medicare Savings for Durable Medical Equipment

Charles Lane has discovered the problem that Medicare often pays an inflated price for durable medical equipment, prosthetics, orthotics and supplies (DMEPOS). My reaction is two-fold: First, although Lane has identified an area of Medicare spending in which savings could be obtained, he's focusing on a tree. Second, Lane only hints at the resistance that is likely to be encountered should Medicare attempt to minimize DMEPOS expenditures.

Lane tells us that "between 2000 and 2010, Medicare spent $69.4 billion on DMEPOS, almost all of it based on the old, inflated reimbursement rates." So, roughly $7 billion per year. In 2010, the Medicare budget was $560 billion. Even if we assume that there was significant growth in the cost of DMEPOS over that decade, such that by 2010 we were spending $12 billion per year, we would still be talking about just over 2% of spending. If we assume reforms not yet implemented could save 1/3 of that amount, we would be looking at saving $4 billion per year. That type of reform is significant - but only makes a material difference to the cost of Medicare in the aggregate.

One of the arguments often made in response to President Obama's proposed tax increases is that they're too small to make a difference.
The proposed tax increase would fail to address the deficit seriously. According to the Joint Committee on Taxation, the proposed tax increase would raise only $68 billion by shifting the top tax bracket from the Bush era rate of 35 percent up to 39.6 percent (plus a few from the health care law). The government expects to spend $9.9 billion per day, or a projected $3.627 trillion for this year. Based on these numbers, the addition $68 billion from a tax increase would pay for 6.8 days of government operation.
It's a fundamentally dishonest argument, and it's absurd to pretend that we could identify a single tax increase that could bring the budget into balance - at least without tanking the economy. The modest savings that can be achieved by cutting waste in DMEPOS spending should not be overlooked, as small steps are worth taking, but Lane seems to overstate the importance of that one aspect of Medicare spending to its overall budget picture, using ten year figures to exponentially increase the size of an average year's expenditure, and omitting any mention of the size of the Medicare budget.

Lane argues that the "obvious solution" is "competitive bidding". Certainly, one way to avoid excessive cost would be to allow Medicaid to use its market power to negotiate with manufacturers, perhaps leaving Medicare recipients free to choose other equipment but making them responsible for any cost in excess of the negotiated price for equipment on its approved list. Distributors could be paid a percentage of the approved cost as their fee for handling the equipment and training recipients in its use. Manufacturers and distributors, I expect, would go ballistic, and would attempt to scare Medicare recipients by talking about "government bureaucrats deciding what equipment you get", and the like. It would be interesting to see Lane flesh out his "obvious" solution in a future column - and if he has the space, he can also address how we can convince the Republicans in Congress that Medicare should be allowed to use its market muscle to achieve savings not just here, but also (and more importantly) for pharmaceuticals.

It's worth noting that a great deal of DMEPOS, despite its substantial cost, is effectively abandoned when the patient no longer needs the equipment. It would be nice if it were possible to recover, refurbish and reuse some of that equipment. Unfortunately, even before considering patient resistance to being given refurbished, older equipment, the cost of recovering, refurbishing and redistributing medical equipment would likely exceed the potential savings.

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