Knee replacements. Coronary stents. Artificial hips. A veritable hardware store of human replacement parts.

It's likely that Medicare is paying too much for these items, costing taxpayers tens of billions of dollars each year, but money can’t be saved until the program overhauls its purchasing practices in this expensive expense category.

The greatest source of expense for medical devices is in the area of implantable medical devices, or IMDs. As America’s baby boomer generation ages, seniors are getting joint replacements and coronary stents at an increasingly higher rate.

According to the U.S. Government Accountability Office (GAO), Medicare is spending more than $20 billion per year on these devices, and procedures relating to IMDs are growing at about 4 percent a year. These numbers are cited in the GAO's most recent study, published last year, which covered 2004 through 2009.

Most of the increase in IMD usage was seen in the use of orthopedic devices, such as artificial hips and knees. The surgeries to implant these and the devices themselves are expensive, so this is a growing area of concern for Medicare’s bottom line. These procedures are likely to increase as more and more baby boomers sign up for Medicare.

When the GAO studied the issue, it was most concerned about price transparency. Although doctors don't directly purchase the devices, their preferences have strong sway over the buying decisions made by the hospitals.

One of the areas of study was whether institutions’ ability to obtain volume discounts was impeded by their own processes. The GAO noted that hospitals sign confidentiality agreements with their suppliers, which makes it impossible for them to shop around for competitive bids. That means, according to the GAO, hospitals are likely paying too much for their IMDs.

"Some hospitals have substantially less bargaining power with the small group of companies that manufacture particular IMDs and, consequently, face challenges in obtaining more favorable prices. The lack of price transparency and the substantial variation in amounts hospitals pay for some IMDs raise questions about whether hospitals are achieving the best prices possible. Any excess or unnecessary costs that hospitals incur through IMD pricing may be passed onto the Medicare program."         

So, the question becomes, how much are hospitals overpaying for IMDs? The GAO’s report doesn’t say, and it's probably too difficult to tell since the third-party purchasing model doesn't give Medicare a direct route for obtaining the best prices. Opaque bidding often leads to overpricing, as vendors don’t necessarily offer the lowest prices, especially when they know that physicians favor certain manufacturers. Clearly, IMD costs are a worthy subject for a GAO audit.

Equipment Fraud Probed

Another area of pricing abuse is in what Medicare calls durable medical equipment, or DME, which is equipment generally used outside the body. This long list includes everything from blood glucose monitors to wheelchairs. After beneficiaries pay their Medicare Medical Insurance (Part B) deductible and 20 percent copayment, Medicare pays the other 80 percent of the cost of the equipment. 

Suppliers have been overbilling Medicare in a number of ways for years. The Office of Inspector General (OIG) for the Department of Health and Human Services discovered $316 million in "insufficiently documented claims" in 2007 alone.

When it examined the delivery of diabetes-related supplies, the OIG found that 76 percent of the payment claims had "documentation deficiencies."

This is just one issue on an extensive list of abuses tracked by the government and AARP. Here's a sampling of some of the other billing scams:

• health care providers or patients submit false claims;
• nursing homes bill every resident for a single equipment order;
• theft of insurance numbers and forgery of doctors' signatures;
• medical providers ship more devices, or more expensive devices, than what was ordered;
• medical providers ship equipment before a doctor has signed the required "certificate of medical necessity";
• failure to give credit for returned items;
• providers bill for duplicate orders;
• providers bill for equipment that was never delivered.

The Justice Department and Medicare have been working together to probe and prosecute fraud through a joint strike force called the Health Care Fraud Prevention and Enforcement Action Team (HEAT), but it has a long way to go before it makes a dent in the widespread overbilling problem.

The OIG has recovered only some $6.9 billion (in fiscal year 2012) of the estimated $64 billion stolen from Medicare each year. This means this government watchdog is missing nearly 90 percent of the fraud it is meant to catch.

What is needed if the government is serious about cracking down on this type of fraud is an overhaul of purchasing practices, as well as regular audits and transparency. 

Medicare has been working on improving its bidding process for durable medical equipment.

Two years ago, on January 1, 2011, CMS launched the first phase of the program in nine major metropolitan areas for nine product categories. CMS said that "in its first year of operation, the competitive bidding program saved the Medicare fee-for-service program approximately $202.1 million, and according to CMS’s Independent Office of the Actuary, the program is projected to save the Medicare Part B Trust Fund $25.7 billion between 2013 and 2022, with an additional $17.1 billion in savings for beneficiaries during that period."

CMS is currently evaluating the first round of the program and starting a new round that will expand the program to 91 new areas.

Open bidding should be required on all medical equipment, or it should be reviewed by the Centers for Medicare & Medicaid Services, so that a single buyer is involved instead of thousands of hospitals purchasing on their own.

This idea has been suggested, in part, by key progressive reformers such as Dr. Ezekiel Emanuel, a former health care adviser to presidents Clinton and Obama. Yet it needs to be grafted into Medicare's institutional practices, so that the government inspectors who police equipment overbilling can prevent it at the front end of the supply chain.  

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