Medicare's new policy strains small firms

— -- Ron Rudderman, who runs a small company in Florida that sells mail-order glucose meters, test strips and other items needed by diabetics, is caught up in a big change sweeping Medicare.

For the first time, Medicare is requiring companies that sell products in 10 broad categories, including diabetic supplies, wheelchairs and oxygen equipment, to compete for the government's business.

The change could save the government program billions, but possibly cause thousands of small companies to close, merge or sell.

The competitive bidding policy will replace the current way Medicare pays for those medical supplies, which is based on a "fee schedule" determined by the agency. After years of debate, including concerns from some businesses and consumer advocates that the move could result in less choice for patients, bids for the first 10 metropolitan areas in the program were submitted Tuesday.

From those bids, Medicare will set a specific amount it will pay for each item, such as a glucose meter or a walker, then select the winning contractors, setting aside about 30% of the slots for small companies with less than $3.5 million in annual revenue. Winners will be announced in March.

Bids from another 70 metropolitan areas will by added next year. By 2010, most of the USA will be included.

Based on pilot tests, Medicare estimates that competitive bidding will save the agency $1 billion a year by 2010. Patients, too, may save. As prices come down, patients will pay less for their share of costs for medical equipment.

But the agency acknowledges that suppliers will be "significantly impacted" by the new rules. The move may fuel merger and sales activity among companies affected by competitive bidding, which was called for in the Medicare Modernization Act of 2003.