Press Releases


For Immediate Release: Tuesday, February 23, 1999
Contact: CMS Media Relations


Overview: Medicare is the largest health care purchaser in the country and should be allowed to negotiate the best deal for taxpayer dollars from competing providers. Yet, the program and its beneficiaries frequently are forced by current law to pay far more than private sector purchasers for the very same goods and services. Thus, the Health Care Financing Administration (HCFA) is proposing a "prudent purchasing initiative" to give Medicare beneficiaries and taxpayers the benefit of market forces. The initiative was expanded in the proposed fiscal year 2000 budget. Even with the slowdown in Medicare growth in recent years, there is still evidence that Medicare pays too much for some services and has not benefited from cost efficiencies that have occurred in the marketplace. HCFA's request to Congress for additional prudent purchasing tools would give Medicare the authority to implement important competitive market reforms to achieve savings, protect beneficiaries and improve quality. The initiative proposed includes:

  • Inherent Reasonableness Authority, which helps cut "grossly excessive" payment rates;

  • Competitive Bidding, in which suppliers submit bids and Medicare selects only the lowest cost bids that provide the best price and quality;

  • Centers of Excellence, in which hospitals and doctor groups meeting high quality standards are paid a single bundled fee for all services related to specific, complex procedures; and

  • Paying Acquisition Costs for Drugs, so Medicare no longer pays inflated "sticker prices."

Inherent Reasonableness. Congress gave HCFA limited authority in the Balanced Budget Act of 1997 to cut "grossly excessive" Medicare payment rates for items or services by up to 15 percent in a given year. In 1998, Medicare contractors surveyed retailers across the country to document items for which Medicare payments are excessive. Based on this data, they proposed initial price reductions in September for lancets, enteral products, eyeglass frames, catheters, test strips and albuterol, which, if implemented, will save Medicare and its beneficiaries an estimated $365 million per year. After considering supplier industry comments on the proposed payment changes, Medicare contractors will soon publish a final notice to implement these changes. Medicare officials are reviewing more items for which the program is paying too much and expect to announce additional proposed price changes soon.

Competitive Bidding. Studies have shown that under current law, Medicare frequently must pay too much for durable medical equipment. Unfortunately, Congress has denied the Administration's request for full authority to implement competitive bidding to help Medicare pay more appropriately for quality durable medical equipment. Instead, the Congress included a Balanced Budget Act provision authorizing Medicare to conduct a competitive bidding demonstration project to focus on such durable medical equipment as home oxygen supplies and hospital beds.

The first competitive bidding demonstration site will be in Polk County, Florida. Suppliers will submit bids, which will be judged based on quality and price. Several suppliers for each item will be selected to ensure that enough "winning" bidders are selected to assure access to services and maintain competition. This past summer, Medicare officials held meetings to educate beneficiaries and local suppliers. Medicare also set up a toll-free hotline and solicited input from local industry representatives. Bidding documents are being finalized, and a conference for potential bidders will be held shortly thereafter.

There already is strong evidence that competitive bidding works. It is used by the Department of Veterans Affairs, which routinely pays much lower prices than Medicare for the same goods and services. It will help Medicare obtain fair prices. It will help curb fraud and abuse because all successful demonstration suppliers must receive a site visit to ensure that they are able to meet both high quality standards and beneficiary needs.

Centers of Excellence. In 1991, Medicare began testing the concept of contracting with high-quality, high-volume medical facilities to provide specific, high-cost procedures. The facilities are paid a fixed rate for all of the facility, diagnostic and physician services associated with coronary bypass surgery. Studies by independent experts show that these centers save Medicare 12 percent on each procedure, while maintaining the quality of care for beneficiaries. In his fiscal year 2000 budget, the President proposed that Centers of Excellence become a permanent part of Medicare nationwide for procedures such as heart surgery and knee and hip replacements. Under this proposal, facilities would retain the Center of Excellence designation for a 3-year period as long as they continued to meet quality standards. Beneficiaries would not be required to go to the Centers, but Centers could provide additional services or waive beneficiary cost sharing to attract beneficiaries.

Paying Acquisition Costs for Drugs. Medicare covers outpatient drugs that are furnished by a physician, oral cancer drugs, and certain specific drugs such as those used with home infusion or inhalation equipment. However, the Medicare payment for these drugs is based on the "average wholesale price" which is, in fact, a "sticker price" that is often far in excess of the actual price paid by providers. The President has proposed legislation in the fiscal year 2000 that would eliminate Medicare payment of these excessive mark-ups, saving Medicare $950 million over five years.

Medicare+Choice Competitive Pricing. Congress directed HCFA to implement up to seven demonstrations designed to change the current administrative method for paying managed care plans, based on fee-for-service, to one based on the competitive market price. The private sector and some states currently use competitive pricing to a large degree. A Competitive Pricing Advisory Committee, comprised of pricing experts, is designing the demonstration and an Area Advisory Committee, comprised of local stakeholders, is advising on implementation issues. The first two demonstrations to be implemented in Kansas City and Phoenix will begin in January 2000.

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