We are here today to assess the impact of the Medicare Durable Medical Equipment competitive bidding program. Our intent is to understand the program's impact on beneficiaries, suppliers, and Medicare expenditures, and the implications for program expansion.
Congress mandated the use of competitive bidding to establish payment rates for high cost and high volume DME in the Medicare Modernization Act of 2003. Congress took this action in response to evidence that Medicare fee schedule payment rates often far exceed retail prices. In fact, in some cases, Medicare beneficiary copays exceeded the cost of the device on the open market. These generous payment rates also made the DME benefit especially vulnerable to waste, fraud, and abuse. A successful small-scale test required through the Balanced Budget Act of 1997 showed that competitive bidding for DME was feasible.
Consistent with the statute, the Centers for Medicare and Medicaid Services implemented a competitive bidding process for nine DME product categories in nine geographic areas on January 1, 2011. This first phase of implementation is known as Round 1. Medicare is in the process of expanding the competitive bidding program to an additional 91 areas, with competition-based payment amounts to take effect in mid-2013. This expansion is referred to as Round 2.
The DME supplier industry has long had concerns about the use of competitive bidding. It is important to understand these concerns not only because numerous beneficiaries rely on medical equipment to keep them in their homes and out of the hospital, but also because many suppliers are the kinds of small businesses that form the backbone of our economy.
Congress, with input from members of this Committee, responded to supplier concerns that the initial CMS effort to implement competitive bidding was flawed. As a result, we passed the Medicare Improvements for Patients and Providers Act in 2008, which terminated the initial Round 1 and required that it be re-bid once improvements were made.
That said, it is important that Medicare pay a reasonable and responsible price for DME so that beneficiary and taxpayer dollars are used wisely. CMS has reported that the competitive bidding program resulted in $200 million in savings in 2011. These first-year program savings are derived largely from competition-based payment amounts that are, on average, 32 percent lower than DME fee schedule prices. And these lower prices mean that beneficiaries are paying less in the form of their 20 percent co-insurance.
A comparison of the Medicare payment for an oxygen concentrator, a common DME item, shows how the Medicare program and its beneficiaries benefit from lower prices derived from competitive bidding. In the nine Round 1 MSAs, Medicare would have paid $2,080 under the DME fee schedule, with a beneficiary paying 20 percent, or $416, on average. By contrast, with competitive bidding, Medicare paid $1,395, and the beneficiary paid $279, on average.
While I strongly believe in the competitive forces of the private market, the process by which the competition is conducted must be fair. To help the Subcommittee understand the successes and challenges associated with Round 1 before the program's scheduled expansion next year, we will hear from witnesses who collectively provide a balanced range of perspectives on the competitive bidding program.