Public speakers at CMS meeting oppose competitive bidding for retail Medicare test strip sales; share thoughts on how best to set payment amounts under the agency’s inherent reasonableness authority – July 24, 2012

Executive Highlights

  • CMS held a public meeting on whether Medicare payment amounts for retail glucose test strips should be directly lowered by CMS under its inherent reasonableness (IR) authority, as opposed to phasing in competitive bidding.
  • CMS will weigh the extensive public comments made at the meeting when deciding whether to enact IR for retail strips; the timing for this was not specified.
  • Generally, the public seemed to support using IR to lower long-term medical costs. However, great debate surrounded whether CMS should base retail payment amounts on the results of competitive bidding for mail order strips.

Yesterday, the Centers for Medicare & Medicaid Services (CMS) hosted a very interesting public meeting regarding the inherent reasonableness (IR) of Medicare fee schedule amounts for non-mail order (retail) diabetic testing supplies at the CMS auditorium in hot and humid Baltimore, Maryland. The meeting was perfectly timed (and highly relevant) for moderator Linda Howard, who was celebrating her 65th birthday. The morning began with remarks from Laurence Wilson, Director of the Chronic Care Policy Group at CMS and Joel Kaiser, Director of the CMS Division of Durable Medical Equipment, Prosthetics, Orthotics, and Supplies Policy, on the IR process, which is used to change Medicare payments that are deemed “grossly excessive” – at least 15% higher than appropriate. For context, the IR process consists of two stages: 1) CMS gathers public input as the agency considers whether to propose an adjustment to the current fee schedule – the purpose of this public forum; and 2) CMS proposes an adjustment to the fee schedule and seeks a second round of public input before crafting a final policy and moving forward with implementation.

The majority of the meeting was devoted to public commentary. From a crowd of just over 80 attendees, 13 individuals voiced their thoughts on competitive bidding, the validity of IR in this situation, and the implications to beneficiaries and suppliers. For those interested, the full transcript of the meeting will be available at the CMS website at some point, and online comments will be welcomed until at least July 30 (possibly later if the transcript isn’t online by then). Following this period, CMS will decide whether to propose a fee adjustment under IR – which we think is most likely. Unfortunately, the timeline for this decision was not provided.

Notably, the morning’s open floor discussion had three major themes: 1) the validity of the data gathered from the competitive bidding process; 2) the value of face-to-face vs. telephonic counseling; and 3) the effect of competitive bidding on brand access. We felt the public generally supported using IR to lower long-term medical costs. However, great contention exists as to whether CMS should bring retail payment amounts in line with the results of competitive bidding in the mail order arena (already implemented in a nine-region pilot program, going nationwide in July 2013). This report offers a review of the agency’s presentation on the IR process, provides background for the public meeting, delves into the public commentary, offering highlights from each individual speaker, and puts forth our questions on the implications of competitive bidding and IR on the blood glucose strip market.


  • Laurence Wilson (Director of the Chronic Care Policy Group) opened the session by reminding the audience of the purpose of today’s public meeting – to discuss whether CMS can and should use its inherent reasonableness (IR) authority to reduce Medicare payments for retail blood glucose strips (as opposed to reducing the payment amounts through competitive bidding). For context, the IR provision allows CMS to adjust Medicare payment amounts when the current payment amounts are thought to be “grossly deficient” or, as is proposed to be the case for retail glucose strips, “grossly excessive” (15% or more above the optimal level).
  • Implementing IR consists of two major stages, Mr. Wilson explained. The day’s meeting was part of the first stage – seeking public input as CMS considers whether to propose an adjustment to the current fee schedule. In the second stage, CMS would actually propose an adjustment to the fee schedule, in which case the agency would seek a second round of public input before crafting a final policy and moving forward with implementation. The goal of CMS, detailed Mr. Wilson, is to ensure access to treatment for the growing diabetes epidemic while serving as prudent stewards of taxpayer dollars. Mr. Wilson emphasized that public participation in policy development is critical to help CMS fulfill this responsibility, ergo the public meeting.
  • Joel Kaiser (Director of the CMS Division of Durable Medical Equipment, Prosthetics, Orthotics, and Supplies Policy) added further context with a presentation on the competitive bidding and IR processes. Section 1847(a)(2)(A) of the Social Security Act mandated competitive bidding programs for durable medical equipment (DME). A competitive bidding program has already begun to be phased in for mail order diabetic testing supplies (and the other DME categories with the highest annual costs). Non-mail order diabetic testing supplies represent the last major category to be phased in (Medicare allowances for non-mail order diabetes testing supplies reached $552 million in 2011 out of a total $1.6 billion attributed to diabetic testing supplies). Mr. Kaiser explained that by deciding to exclude retail strips from the initial competitive bidding process, CMS gained a unique opportunity to use IR to set retail payments based on information gathered from local Round One Rebid competitions for mail order strips. (The opportunity is unique because only diabetes testing supplies were “bifurcated” into two separate categories based on method of sale.)
  • Mr. Kaiser detailed a number of advantages to IR including: 1) IR would reduce the price discrepancy sooner than the competitive bidding option; and 2) IR would allow all enrolled suppliers to continue furnishing supplies to medical beneficiaries (provided they could bear the reduced payments of the new fee schedule). By contrast, competitive bidding could involve as few as five local suppliers being awarded contracts in a given area. Mr. Kaiser also made it a point to dispel an inaccuracy he has seen reported in the press that pricing changes are limited to 15% per year – this limit applies to contractors but not to CMS, he explained. For additional information on the IR process, we refer you to the morning’s slides at:
  • The payment fees from Round One Rebid competitions have already been implemented in nine metropolitan areas as of January 1, 2011. The bidding resulted in an average 55% price decrease for mail order strips in these nine locales, where the Medicare payment for a box of 50 strips dropped to $13.88 - $15.62 [note: the competitive bidding amount in each area is determined by the median of the winning bids submitted]. For comparison, payments for mail order strips (without competitive bidding) currently average $32.47 per box of 50, and retail strips average $37.67 per box of 50.
  • Under the upcoming nationwide rollout of competitive bidding for mail order test supplies, revised contracts and payment amounts are scheduled to take effect July 1, 2013. In contrast to the nine-area round of competitive bidding, the nationwide rules require that suppliers provide at least 50%, by market share volume, of all types of mail order diabetes testing strips (seven types of diabetic testing strips accounted for ~50% of the market share associated with Medicare claims, and 19 types accounted for ~81% of the market share in 2009. For a full share breakdown see page 8-11 at A second provision is the anti-switching rule, which mandates that suppliers cannot tell beneficiaries that they must switch to a new strip brand. These rules would theoretically prevent manufacturers from offering an inappropriately narrow and unfamiliar selection of strips. However, while the anti-switching rule prevents suppliers from dictating which brand beneficiaries use, our impression is that it does not require suppliers to offer the specific brands that beneficiaries have been using.


  • Several speakers in the public commentary period argued that the competitive bidding pilot may not be a realistic indicator of the best payment level for the overall mail order market. First, the pilot program included only nine metropolitan areas, meaning that participating suppliers could absorb costs elsewhere in the US. Second, the median bid, not the actual bid, was used to determine cost in a given area (meaning that some suppliers ended up losing money on certain strip brands). Third, the competitive bidding process at this time did not include the 50% rule. Furthermore, the general effectiveness of CMS competitive bidding auctions have been widely questioned. The most notable example of this is an open letter to President Obama, signed by 244 economists, expressing concerns about the quality of the data obtained from competitive bidding auctions in general. The signers suggest that by allowing non- binding bids and by setting the contract equal to the median of the winning bids, the CMS system incentivizes “low-ball bids” that cannot be realistically implemented. They also take issue with the system’s lack of transparency with regard to how many winners each auction has.
  • Speakers expressed concern about CMS transparency in the IR process. Specifically, CMS spoke to “other sources of information” (besides competitive bidding pricing information) being used in IR evaluation, but, much to the chagrin of the audience, details were not divulged.
  • Input costs between mail order and retail supplies could differ, warranting differential payment evaluation. Retail pharmacists argued that smaller volume orders and different selection translate into higher input prices. However, mail order suppliers suggested that retail pharmacies have access to comparable prices (or at least, that the price differential does not justify the current 55% discrepancy between mail order strips and retail strips). The mail order suppliers proposed that, if anything, they have higher administrative costs because of accreditation and licensure requirements.


  • The level of medical expertise offered in person by retailers vs. telephonically by mail order suppliers may be different. While community pharmacists offer the benefit of face-to-face discussion and patient familiarity (often serving a patient over multiple years andsometimes decades), the CDEs employed by mail order companies can offer a wealth of diabetes- specific training to patients in the mail order realm.
  • The level of cultural expertise may differ between retail and mail order services. Because of cultural, language, or economic barriers, some patients prefer face-to-face communication. Mr. Daniel Nam (National Community Pharmacists Association) framed it best: a key concern in minority health is whether patients feel like they belong to the system, and this often requires face-to-face counseling. However, the accreditation process for mail order suppliers technically requires multilingual services, creating the antagonism between local knowledge offered by community pharmacists vs. the accreditation requirements for mail order suppliers. (Granted, the proportion of community pharmacists who demonstrate the necessary cultural competency will be important for the former and the extent of the multilingual services required by the accreditation process will determine the significance of the latter.)
  • Whether counseling services should even be considered in product pricing determination was at the forefront of this debate. Community pharmacists generally commented that they offer these services gratis, but depend on favorable margins in product revenue to do so. On the other hand, representatives of the mail order supply community tended to argue that these services should be reimbursed separately from the product if they are valuable.


  • Competitive bidding may restrict brand availability. Mail order suppliers argued that the 50% by volume mandate coming into effect in 2013 (requiring suppliers to offer 50%, by volume, of all mail order diabetic testing strips) ensures brand access for beneficiaries. However, according to an American Association of Diabetes Educators (AADE) survey, of the nine brands identified as the top mail order diabetes testing supply brands, contract suppliers currently offer on average, 1.44 brands. Granted, this data was collected for the nine competitive bidding areas [CBAs] where the 50% rule was not in effect. For the full AADE report, please see
  • Public commentary addressed the question of how much value familiar name brands confer. While mail order suppliers commented that every brand offered was FDA approved, other speakers emphasized that CMS cannot undervalue patient comfort with a certain brand given how hard it is for older patients to switch products. Despite the impending anti- switching mandate (that prevents suppliers from dictating beneficiaries switch strip brands), our understanding is that it does not require that suppliers continue to carry their patient’s previous brand. Currently, beneficiaries can turn to retail suppliers if their brand is no longer offered by mail order, but the product mix offered by local retail pharmacies could be in jeopardy if pricing levels obtained from competitive bidding is applied to retail pharmacies without adjustment.


  • Diabetes supply entrepreneur Alan Rudy favored entirely eliminating the price difference between mail order and retail (he referred to this difference as the KL modifier, after the code for diabetes supplies billed as delivered by mail). He indicated that this could potentially be accomplished by the IR authority, but he also proposed a bold alternative: that all retail stores could become simply “drop shippers” – intermediaries for mail order suppliers. Mr. Rudy believed universal drop-shipping would be a win for all parties: retailers would have less paperwork (since much of this would be processed through the mail order supplier), mail order suppliers would also save on hassle factor (since shipping to one retail location is simpler thanmailing to multiple different patients), patients would be able to choose between mail order and retail (with no difference in price), and Medicare would save money (since prices would fall to the mail order level across the board). Current CMS rules limit the implementation of such a plan due to technicalities about which addresses suppliers are allowed to use; however, Mr. Rudy said these rules could be rewritten with relative ease. (He said that another reason for CMS opposition has been the expectation that retail strips would be phased in under competitive bidding, but he expressed doubts that this will ever actually happen given how long bidding on retail strips has been discussed without real action.) Mr. Rudy concluded that a drop-shipping plan would have wide support on all sides provided CMS gives the go-ahead. We were interested to learn about this approach but think Mr. Rudy’s proposal is unlikely to be implemented: no one else mentioned it at any length it in their own comments, even though Mr. Rudy was the first speaker.
  • Linda Langiotti (Quality Diabetes Care Coalition) spoke on behalf of mail order suppliers as a representative of CCS Medical, arguing that a single price for mail order and retail strips is the right policy. She suggested that by excluding non-mail order strips from the competitive bidding process, CMS eliminated savings to the system. Medicare, she said, should not be paying 2.5 times the amount for the exact same product. She encouraged CMS to use IR to reduce payment discrepancies between retail and mail order strips for several reasons, arguing: 1) the current price discrepancy encourages waste, fraud, and abuse; 2) the cost structure for both channels is similar (and if anything, mail order administrative costs are higher because they require accreditation and licensure in every state and (soon) must also adhere to the anti-switching and 50%-by-volume-rule mandated in competitive bidding); 3) beneficiaries switched to retail suppliers following competitive bidding resulting in increased out-of-pocket cost for beneficiaries (she posited retail advertising was responsible, we note changing brand availability was a likely contributor); and 4) patient adherence is higher with mail order vs. retail, owing to services like diabetes care hotlines and periodical check-ins.
  • Speaking from 25 years of experience in the independent pharmacy arena, William Popomaronis (National Community Pharmacists Association) passionately argued that current retail prices are reasonable given pharmacies’ high acquisition costs and the un-reimbursed services they provide. He said that as a longstanding community member, he can provide advice that older, fragile, skeptical patients will trust and follow – unlike the advice of unfamiliar mail order suppliers, he implied. Mr. Popomaronis proposed that the “human touch” effects on adherence and education may involve higher spending on Medicare Part B (equipment) and Part D (drugs), but the costs of hospitalization and acute care (Part A) are far lower because of these effects. Thus, he said, CMS must evaluate costs across Medicare as a whole rather than considering Part B “in a vacuum.” Mr. Popomaronis also noted that as a small franchise-owner he would not be able to compete against the volume-based discounts that mail order suppliers get – especially since as a neighborhood retailer he must stock the products that each patient knows and uses rather than what would be most expedient for him. He concluded that mail order prices from the first nine CBAs are an inappropriate comparator for the retail sector; he warned that if independent pharmacies get pushed out of the test-supply business due to drastic cuts in the Medicare fee schedule, patients would suffer.
  • Jonathan Napier (CCS Medical) supported the use of IR to protect beneficiaries and correct the imbalance between mail order and retail strip prices. He explained that the lower volume purchases by retail suppliers does not justify the current price discrepancy, suggesting that retail pharmacies enjoy comparable purchasing prices. Similarly, the face-to-face counseling provided by retail pharmacies does not account for the 55% payment discrepancy, arguing that: 1) mail order suppliers offer counseling over the phone by CDEs (suggesting thatpharmacists may not be trained to provide the same caliber advice); and 2) the payment amount should be for the actual product supply only, not the counseling. He concluded that CMS needed to collect data on the administrative burdens, and adjust payment amounts accordingly. However, Mr. Napier seemed to expect that the assumption of identical administrative costs between mail order and retail suppliers would be validated with further investigation.
  • Daniel Nam (National Community Pharmacists Association) made an emotional appeal for the value of face-to-face counseling, especially in communities where language and other cultural factors can create significant barriers to the healthcare system. Mr. Nam, who owns a pharmacy while also attending law school, said that he is happy to provide patients with the culture-specific advice they need – and which he thinks cannot be provided simply by phone or with translated pamphlets. However, these services are not themselves reimbursed, and over the years he has been forced out of selling many products that are subject to competitive bidding (e.g., wheelchairs, canes, walkers). Mr. Nam said that he thus depends on profits from diabetes supplies to stay in the game and, by extension, to keep his minority customers engaged in the healthcare system. Mr. Nam reminded the listeners from CMS that they are under no obligation to compare prices between mail order and non-mail order sectors. (Indeed, he said that in his experience, many mail order companies auto-ship “indiscriminately” and create waste in the system.) Echoing his fellow NCPA member Mr. Popomaronis, Mr. Nam stressed that given the need for education and adherence, test strip pricing must reflect more than just the cost of the materials: “test strips are not walkers.”
  • Samuel Silak (Liberty Medical Supply) offered rebuttal comments to arguments favoring higher retail pricing. First, he reminded the audience that strip ordering is an issue of product resupply. Thus, educational and training services provided by pharmacists should not be reimbursed under the veil of higher retail prices for strips, but rather a separate code should be established to reimburse these services (if they are indeed deemed reimbursable). Second, to the comment that mail order suppliers oversupply, he emphasized that to ship any order, mail order suppliers require beneficiary consent. Third, addressing Mr. Nam’s comments regarding multi- lingual services offered by face-to-face consultation, Mr. Napier explained that for mail order suppliers to be accredited, they must offer multi-lingual services. Finally, to the comment that mail order suppliers do not offer the same education services, he argued that they do, just telephonically.
  • Bob Kusher (LogiMedix) argued that early experience with competitive bidding in the mail order strips market is not only a poor analog to the retail strips market; it may be a poor predictor of nationwide competitive bidding for mail order strips, as well. (He mused that current Medicare payment amounts for retail strips [~$37] are already far lower than the prices paid by uninsured patients [over $50, often].) In the first round of competitive bidding on mail order strips, many of the nation’s largest suppliers either did not compete or did not win bids. But Mr. Kusher, whose decades of industry experience include positions with both mail order and retail suppliers, forecasted that in the nationwide bidding these large suppliers will need to be incorporated to meet demand, even if they bid relatively high amounts. (Other differences between the Round One and nationwide bidding processes include the implementation of the 50% rule, whereby suppliers must offer a selection of strips that corresponds to at least 50% of the market by volume.)
    • Mr. Kusher explored a phenomenon also noted by other speakers: that in the first nine CBAs for mail order strips, customers shifted from mail order to retail channels despite the much-lower prices on the mail order side. Onepossibility for the shift is that customers wanted to use the big-name brands that were most likely to be familiar to them and recommended by their doctors. However, these were not widely available from the first-round contract-winning suppliers – a fact that allowed the suppliers to make profits even when selling at ~$15. Mr. Kusher said that these mail order suppliers got many of their strips at a wholesale cost of under $10 for a box of 50. By comparison, strips from the Big Four manufacturers (i.e., Abbott, Bayer, J&J, and Roche) come at a wholesale cost of nearly $27 for a box of 50, even with manufacturers’ discounts for sales to Medicare patients. Mr. Kusher believed that as long as CMS seeks to preserve consumer access and provider choice, retailers are the logical conduit for higher-end options.
  • Bruce Levinson (Center for Regulatory Effectiveness) argued that CMS auction price data is neither reliable nor valid, calling for higher-quality data and greater transparency by CMS. He pointed to a letter for President Obama, signed by over 240 economists, which read: “The CMS competitive bidding program violates all of the principles [in President Obama’s Executive Order on Improving Regulation and Regulatory Review], especially the principles of transparency and of basing regulations on the best available science. Indeed, the current program is the antithesis of science and contradicts all that is known about proper market design.” To read the full letter (which further details concern about the fundamental flaws of competitive auction), please see comments-of-concerned-auction-experts-on-medicare-bidding.pdf.
  • Representing the Diabetes Access to Care Coalition, Dr. Paul Radensky (McDermott, Will & Emory) offered four thoughts about how CMS should consider setting prices under its IR authority.
    • Dr. Radensky’s central argument was that if CMS invokes its IR authority with regard to non-mail order strips, the paramount concern would be the quality of the data used in setting prices. Factors that should not be considered, noted Dr. Radensky, include whether CMS likes or dislikes the price and whether competitive bidding can still be pursued in a “backdoor” way.
    • Prices for mail order strips – even the new prices coming in July 2013 after nationwide bidding – might not be an appropriate proxy for retail prices, Dr. Radensky argued. He deliberately left aside the controversial issue of how prices should reflect face-to-face service costs and instead evaluated the CMS briefing presentation’s assumption that mail order and non-mail order channels face the same product acquisition costs. The costs are actually inherently different, he said, due to inherent differences in how strips are sold. Dr. Radensky argued that retail selection is driven by what products are most likely to catch consumers’ eyes: thus retailers tend to stock products with brand recognition. By contrast, he said, mail order suppliers are primarily looking for the most favorable contract. Further, individual retail stores – even outlets for nationwide chains – must cater to local demands. Dr. Radensky indicated that this further complicates the issue of how prices should be set (though he said that his organization is happy to provide CMS data that could help the agency make sense of this complexity).
    • The CMS meeting documents alluded to other data (besides mail order pricing levels) that the agency might use to set retail prices; Dr. Radensky encouraged CMS to share more about these data so that the public could weigh in.
    • Despite some arguments to the contrary, access and quality are different between retail and mail order, he said. With regard to access he reviewed a survey of the nine Round One CBAs conducted by the AADE, (results announced December 2011). The AADE surveyors found that of the top nine testing supply brands by nationwide Medicare market share (as reported in 2010 by the US Health and Human Services Office of the Inspector General), an average of only 1.44 (16%) was offered in each CBA. As for quality, Dr. Radensky cited an AACE presentation evaluating the accuracy of seven test strips that are rarely offered by retailers but commonly sold by mail order: four of the seven failed to comply with ISO accuracy standards. “If you drive toward the lowest common denominator,” Dr. Radensky warned the CMS representatives, “this is what you drive toward.”
  • Richard Price (Advanced Medical Technology Association) urged CMS to be cautious using price and payment information from competitive bidding as a guide to adjust payments through retail pharmacies. He explained that mail order auction bids inherently rely on perceived volume increases as competition is driven out of the market, something that would not be the case in retail. And, like other presenters, Mr. Price asked CMS to divulge details on the “other pricing information” – i.e., besides auction pricing data from mail order strips – that they would base their fee schedule adjustments on. Furthermore, he worried about the impact of competitive bidding on brand availability for beneficiaries. Like Dr. Radensky, he referenced the AADE survey finding that only a mean 1.44 of the top nine brands were offered by mail order suppliers following the Round 1 Rebid, likely meaning that beneficiaries in areas subject to competitive bidding in round one were made to submit to different testing systems.
  • Eric Juhl (National Association of Chain Drug Stores) reiterated several other speakers’ arguments against basing retail payment decisions on mail order prices. He cautioned that too-low prices would drive neighborhood pharmacies out of the diabetes supply business, forcing patients to get their medications and test supplies from different sources, without the in-person guidance of local pharmacists on test supplies. This would increase the possibility of confusion, reduce the likelihood of adherence, and raise the risk of serious contributions, Mr. Juhl argued.
  • Laurence Clark (National Government Services) reminded CMS that the human side involved in retail purchase is invaluable.
  • Walter Gorski (American Association for Home Care) impressed upon CMS that all diabetic testing supplies are not the same and that competitive bidding greatly reduced the types of brands available. Like earlier speakers, Mr. Gorski referenced the AADE study showing that the types of brands available under competitive bidding differ dramatically. Switching testing supplies is not easy for the elderly. The American Association for Home Care, he said, has collected many complaints about decreased access to commonly prescribed or preferred products with competitive bidding. Thus far, he said, CMS has had an “escape valve” – agency representatives could direct beneficiaries to retail. If CMS applies competitive bidding pricing to retail suppliers, this may no longer be an option. Additionally, suppliers in the competitive bidding areas have been able to supplement revenue from areas that have not yet implemented competitive bidding, a luxury that would no longer exist once the national 2013 mail order fee schedule is implemented and if CMS makes an IR adjustment to retail payments based on mail order competitive bidding prices.
  • Though most of the day’s discussions implicitly concerned consumers with type 2 diabetes, Cynthia Pazos (Diabetes Management and Supplies) highlighted pump- and/or-CGM-using type 1 diabetes patients as being especially vulnerable to acute events if access to test supplies is interrupted. She forecasted that competitive bidding would increase the likelihood of such disruption in patients’ access to supplies. Therefore she argued strongly in favor of the inherent reasonableness proposal. (Another message of her talk seemed to be that the new prices should not be set too low, so that suppliers that offer insulin pumps and CGMs – for instance, her company – would still be able to provide test strips, as well.)

Close Concerns Questions

  • How flexible is pricing – will large companies adjust their pricing to reflect changing market prices from competitive bidding?
  • Will payment amounts for Medicare beneficiaries set the reimbursement precedent for the rest of the market?
  • How will the national competitive bid prices compare to what we saw in the nine metropolitan cities? Specifically, will the 50% legislation affect bids?
  • Does the anti-switching rule force mail order suppliers to accommodate patients that are using non-covered brands of meter, or does it merely prevent suppliers from mandating which new meter they use?

-- by Kira Maker, Joseph Shivers, and Kelly Close