The Department of Health Services (DHS), or its successor, should implement a competitive bid process to purchase all durable medical equipment for the Medi-Cal program at reduced rates through a limited number of providers.

Medi-Cal is California's Medicaid health care program. This program pays for a variety of medical services for children and adults with limited income and resources. Medi-Cal is supported by federal and state taxes.

The Medi-Cal program currently pays for a broad range of durable medical equipment (DME). Item costs vary from a few dollars per item to items that cost thousands of dollars. DME includes items such as canes, crutches, walkers, oxygen equipment, wheelchairs, patient monitoring devices, infusion equipment, breast pumps, inhalation therapy equipment and nerve, muscle and bone stimulators. Total Medi-Cal costs for DME have escalated in recent years with total expenditures for DME rising from $63 million in Fiscal Year 1994-1995 [1] to $230 million in FY 2002-2003.[2] This represents an increase of 265 percent during an eight year period.

The Department of Health Services (DHS) has pursued cost savings for other high-cost benefits through negotiating substantial rebates and discounts from providers such as drug manufacturers and infant formula manufacturers. Welfare and Institutions Code Section 14105.3 (b) allows DHS to enter into exclusive contracts with manufacturers for DME products.

Based upon the previous successes of competitive bidding and given the existing legal authority, DHS was approved for a budget change proposal in FY 2002-2003 which established positions and funding to implement and oversee the DME Contracting Program. In justifying the additional resources needed to implement the contracting program, DHS estimated annual savings to the Medi-Cal program of $19 million ($9.5 million General Fund). The full year savings for this effort were included in the original Medi-Cal Estimate for FY 2004-2005.[3]

To date, DHS has yet to implement a DME contract due to conflicting program priorities and a perception that recent reductions to DME reimbursement rates will minimize potential savings.[4] Due to this failure, the May revision to the 2004-2005 Governor's Budget now estimates $7.4 million in savings in FY 2004-2005, assuming a November 1, 2004 initiation, and $11.2 million on an ongoing basis.[5] The reduction to the annual savings figure in the Medi-Cal estimate reflects DHS estimates of a reduced number of DME items that will be competitively bid, and represents a projected 15 percent savings for those items that will be competitively bid.[6] Greater savings can be generated by implementing a competitive bid process that stipulates that the winning bids must include a weighted average rate reduction in the products offered of 10 percent, and no product shall be offered at a price that is above the rate established within Title 22, California Code of Regulations.

Other states have initiated processes to competitively bid

The states of Florida, New York and Texas have taken steps towards initiating competitive bidding for the provision of DME products or medical supplies. Florida has implemented a competitive contract for hospital beds and respiratory equipment and supplies.[7] New York has issued competitive bids for incontinent supplies and diabetic supplies. Texas has yet to implement a competitive contract pending ongoing discussions with the provider community. Although, due to the recent implementation of these competitive bid processes, there exists no confirming data, the State of Texas 2001/02 biennium budget reflected anticipated savings of $18.3 million total funds ($7.3 million General Fund) for planned contracting.[8] It is important to note that all three states have received concerted opposition from the DME and medical supply community, including filing of litigation. To date, no litigation has expressly forbidden competitive bidding.[9]

At the federal level, the federal Centers for Medicare and Medicaid Services has conducted demonstration projects on the feasibility and effectiveness of establishing competitively bid Medicare fees for DME with great success. The demonstration projects were conducted in Polk County, Florida and in Bexar, Comal and Guadalupe counties in Texas. The results of the projects showed overall savings to Medicare of 17 percent to 22 percent and no significant adverse effects on beneficiaries.[10] Most important to California, given recent trends in usage, the projects showed significant declines in usage and the associated costs of oxygen-related items and services, which is shown by Electronic Data Systems, the California fiscal intermediary for Medi-Cal claim payments, as one of the areas of most dramatic DME reimbursement increases for California.[11]

Strategic purchasing can improve the fight against fraud

Fraud is prevalent in the area of DME due to the potential for quick profits, the relative ease that providers have in obtaining beneficiaries' eligibility numbers and there being no licensing requirements for providers of DME products. A Florida Statewide Grand Jury Report reported that the Florida Agency Health Care Administration was incurring DME fraud of $3.5 million annually.[12]

The California Bureau of State Audits, in 1999 suggested that DHS initiate reenrollment of all existing Medi-Cal providers as part of an effort to curtail suspected fraud in Medi-Cal. As DME was considered the highest area of fraud risk, DHS completed reenrollment of all DME providers by the end of FY 2000-2001 and placed a moratorium to suspend further enrollment of DME providers into the Medi-Cal program. There are 848 DME providers enrolled to participate in the Medi-Cal program, which is approximately 500 less than existed prior to the reenrollment exercise and initiation of the moratorium. The contracting via competitive bid for DME services would further dramatically reduce the number of DME providers, thereby consolidating the auditing of providers and allowing for fewer, more in-depth audits to address fraud, and the implementation of activities such as unannounced visits to DME providers to ensure that the providers are a viable business.

Recommendations
The Department of Health Services (DHS), or its successor, should contract for the purchase of all durable medical equipment by competitive bid, with a limited number of providers.

This strategy will allow for significant savings, known standard costs for durable medical equipment (DME) devices, potential minimization of fraudulent billings and fraudulent providers, and increased ability to audit the universe of Medi-Cal DME providers.

The competitive bid process should stipulate that the winning bids must include a weighted average rate reduction in the products offered of 10 percent, and no product should be offered at a price that is above the rate established within Title 22, California Code of Regulations relating to reimbursement rates for DME.
The competitive bid process should include all durable medical equipment devices and supplies, including prosthesis and orthotic devices.
It is imperative that the competitive bid process ensure that Medi-Cal beneficiaries have adequate reasonable access to providers of DME.

In assuring access, DHS, or its successor, should be directed to specifically address geographical barriers, public transit barriers and hours of service barriers.

DHS, or its successor, should issue a Request For Proposals by September 1, 2004 and award individual contracts by January 1, 2005.

Staff has already been approved for this task, so the proposed timelines are viable.

The May revision to the FY 2004-2005 Governor's Budget includes General Fund savings for FY 2004-2005 and an additional savings thereafter for DME contracting. The annual savings figure in the Medi-Cal estimate reflects DHS estimates of a reduced number of DME items that will be competitively bid, and represents a projected 15 percent savings for those items that will be competitively bid. The Governor's Budget also reflects $354 thousand in ongoing staffing costs to implement DME contracting.

A greater level of Medi-Cal savings can be generated by implementing a competitive bid process that stipulates that the winning bids must include a weighted average rate reduction in the products offered of 10 percent, and no product shall be offered at a price that is above the rate established within Title 22, California Code of Regulations. The projected savings shown are based on a 10 percent reduction in the pricing of all DME products, using calendar year 2003 total payments of about $244 million for all DME products as provided by the DHS Fee-For-Service Claim Data Warehouse.[13]

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