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Bad Bargains for Federal Health Programs

More than a quarter of all Federal dollars are spent on health programs, with $80.1 billion in the President's 2014 Budget for the Department of Health and Human Services (HHS). In a time of budget-cutting and fiscal crises, it's more important than ever to be sure that this money is put to good use. Yet according to a 2012 Institute of Medicine report, 30% of all U.S. health spending is wasted (see side bar on waste). This equates to roughly $750 billion in 2009 alone. Some of this can be attributed to fraud but much is simply a result of inefficient spending.

For example, numerous OIG studies have found that Medicare and Medicaid sometimes pay significantly more than private companies do for the same medical procedure, service, or product. OIG's report on Medicare payments for laboratory tests - Comparing Lab Test Payment Rates: Medicare Could Achieve Substantial Savings - found that Medicare paid between 18 and 30 percent more than other insurers for all 20 of the lab tests included in the study. As Medicare is the largest payer of lab tests, this amounts to a significant payment discrepancy -- $910 million in 2011 alone. OIG recommends that the Centers for Medicare & Medicaid Services (CMS) seek legislation to lower their Medicare payment rates for lab tests as well as to introduce copayments and deductibles.

OIG also found several instances of payment disparities for medical supplies. The OIG report Comparison of Prices of Negative Pressure Wound Therapy Pumps found that in the first half of 2007, suppliers purchased new negative pressure wound therapy pumps, used to treat severe wounds and ulcers, for an average price of $3,604. In contrast, Medicare's purchase price was $17,165 for the same pump, more than four times the average purchase price. A similar pricing disparity exists with a specific type of lower-back orthotic device. The report Medicare Supplier Acquisition Costs for L0631 Back Orthoses found that from mid-2010 to mid-2011, while suppliers spent an average of $191 for this orthotic device, Medicare paid an average of $919. This resulted in Medicare and its beneficiaries spending a total of $37 million more than suppliers paid to acquire this one type of back orthotic alone.

In both cases, OIG recommended that CMS reduce the amount it pays for this equipment. OIG also recommends including these products in the Competitive Bidding Acquisition Program, which creates competition between suppliers. CMS began implementing this program in 2007 to reduce costs to beneficiaries and improve the accuracy of Medicare payments.

The cost of diabetes testing strips (DTS) was reduced by inclusion in Medicare's competitive bidding program. Before the bidding program, CMS paid less for mail-order DTS than for non-mail order DTS, which created an incentive for providers to bill for the more expensive non-mail-order strips. The OIG report Supplier Billing for Diabetes Test Strips and Inappropriate Supplier Activities in Competitive Bidding Areas found that claims for non-mail- order DTS increased by 30 percent in 2011 while claims for mail-order DTS decreased by 71 percent. As of July 1, 2013, CMS implemented changes that eliminate this disparity.

However, pricing disparities for DTS still exist in Medicaid. State Medicaid programs reimburse providers for DTS at varying rates. Some States use competitive bidding programs or collect rebates from the test strip manufacturers as ways to dramatically lower the cost. If Ohio's Medicaid program used the same competitive bidding program as Medicare or if they adopted a rebate system similar to the one used by Indiana's Medicaid program, costs for DTS could be cut in half! More information is available in OIG reports on Indiana and Illinois DTS payment rates.

The Medicare and Medicaid programs cost a combined total of $962 billion in 2011. Continuing to identify and eliminate pricing and payment disparities could save millions - if not billions - of dollars, helping ensure that these programs can continue to provide vital services to citizens for years to come.


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Office of Inspector General, U.S. Department of Health and Human Services | 330 Independence Avenue, SW, Washington, DC 20201