Case Study:Setting Prices for Walkers

Wal-Mart sells a walker called the Carex Explorer for $59.92. Medicare covers the Explorer, but it used to pay more than $100 (Leonhardt 2008). Between 1989 and 2011, Medicare paid for equipment such as walkers using a fee schedule equal to 95 percent of a products average wholesale price (an unverified number provided by manufacturers). This system kept Medicare fees substantially higher than typical retail prices (US Government Accountability Office 2012).As a part of the Medicare Modernization Act of 2003, Medicare accepted bids for ten types of equipment in ten metropolitan areas. The median accepted bid was 26 percent lower than the existing Medicare fee. Equipment manufacturers and retailers responded by lobbying Congress to discard the bids and delay the program, and the House of Representatives obliged by passing a bill to ditch the bids. In fact, it was only with the passage of the Affordable Care Act that Medicare was able to launch competitive bidding in 2011 (Japsen 2013). Even though Medicare anticipated savings of 45 percent on competitively bid products and 72 percent for mail-order products, in 2013 more than 200 members of Congress signed a letter asking that the program be delayed (Blum 2013). This example demonstrates three points. First, a well-designed bidding process can result in lower prices for public pro-grams. Second, such programs are expensive and take a long time to set up and implement. Third, efforts to switch to a bidding process will encounter opposition from those whose profits are at risk.

Discussion questions:

What are the risks of a bidding process like the one described in this case?

Why would elected representatives side with the manufacturers and retailers on this issue?

Suppose that Medicare sought bids for enough cardiac care to serve beneficiaries in your hometown. What would happen economically and politically? Could you design a way of insulating Medicare from political pressure? Would you want to?

What problems other than paying too much might distorted fee schedules cause?