Economist: 'Industry is already competitive'

Tuesday, February 23, 2010

WATERLOO, Iowa - Competitive bidding for HME needs to be addressed in "a more forthright manner," according to a new report conducted by Brian O'Roark, an economics professor at Robert Morris University in Pittsburgh, and funded by The VGM Group.

The report, "The Impact of Competitive Bidding on the Market for DME—An Update," continues O'Roark's analysis of the likely economic consequences of the program.

"I urge all HME providers to get this study into the hands of their Congressional representatives immediately," stated Mike Mallaro, VGM's CFO/CIO.

O'Roark and VGM teamed up in 2008 for a report titled "Analysis of the Economic Impact of Competitive Bidding on the DME Market: A One Year Update."

In the new report, O'Roark likens competitive bidding to "franchise bidding."

"Firms are acting in a competitive fashion to acquire the governmentally protected right to provide medical equipment to a given geographical area," O'Roark writes. "Thus firms are competing for a franchise."

The problem with that, according to O'Roark: Franchise bidding only works in industries where there are economies of scale, and the HME industry isn't exactly one of those industries.

"All research on competitive bidding agrees that it is relevant only when a single large firm can serve a geographic area at lower cost than multiple firms," O'Roark writes. "Market competition, (citing economist Robert Burton Ekelund), 'would likely prove a more efficient cost-price tracking system than the system enshrined by politically-involved bilateral bargaining between regulators and regulatees.' The most telling failure of the program is that it is being applied in the wrong kind of market."

The downsides of "franchise bidding" include problems with long-term contracts ("if re-bidding opportunities are too far apart you drive the competition permanently out of business"); reductions in service ("a cheaper-is-better attitude must be paid for somehow"); and opportunistic behavior ("competition must be prevalent every time there is a bidding stage, otherwise price will not be reduced and the winning firms become prone to entrenchment").

O'Roark concludes: "If the regulators do not understand the market, a bidding plan will not provide the proper incentives. More problematic is when a competitive bid plan is put in place for an industry that is already competitive. This would, it seems, defeat the purpose of the bidding."

Check VGM's Web site,, for the full report.