Medicare’s competitive bidding seriously threatens device makers

Market Realist

What is competitive bidding?

Competitive bidding is a Center of Medicare/Medicaid (CMS) program for durable medical equipment, prosthetics, orthotics, and supplies that’s designed to reduce the out-of-pocket costs for Medicare beneficiaries and save Medicare money while maintaining high-quality products.

How does it work?

(Read more: Medtronic purchases Cardiocom: Bad for medical device industry?)

Here’s how the program works. Suppliers bid to become Medicare’s primary contractors for certain medical equipment or supplies in CBAs (competitive bidding areas—areas in the United States where only contracted suppliers can furnish equipment for Medicare beneficiaries). Medicare uses the bids to arrive at a single payment amount that must be lower than the “fee schedule” amount. So beneficiaries who live in CBAs will be able to pay less for certain devices or equipment. The CMS justifies the program by citing that the prices it pays are inaccurate and outdated and that these new prices reflect recent efficiencies in manufacturing models, and accordingly, will be more accurate.

Round one

In 2011, the CMS implemented the first round of this program to adjust skyrocketing prices and help limit fraud and abuse. The program has saved more than $400 million in its first two years, operating in only nine areas of the United States.

(Read more: Why shifts in Chinese regulation could benefit U.S. device makers)

Why is this relevant today?

On July 1, the CMS began expanding this program to 91 additional areas. The program is projecting savings of 45% below current payments, and savings for the national mail order program are estimated as high as 72% below current fees. An estimated $43 billion is expected to be cut out of payments in the next ten years.

(Read more: Why the medical device tax repeal bill shouldn’t pass anytime soon)

How does this affect device makers?

In the wake of Obamacare, medical device makers are already struggling with reductions in federal reimbursement, the 2.3% excise tax, and a more stringent FDA. The expansion of the competitive bidding system will put additional pressure on device manufacturers trying to stay in business. The process will significantly drop reimbursement for bid winners and take away an entire market for bid losers. Look for profit margins to trend negatively as a result of this expansion and for valuations to drop as more and more contracts are awarded, each with estimated 42% reductions in reimbursement.

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