Cramton’s New Round 1 Analysis: Pull the Alarm!

BALTIMORE — The Centers for Medicare and Medicaid Services
hasn’t heard the last of Peter Cramton. Nor has Capitol Hill or
even the White House. The professor of economics at the University
of Maryland — who spearheaded a September letter to Congress
signed by 166
economists detailing the flaws of competitive bidding —
continues to analyze the program, and he is not encouraged.

In fact, he is so troubled that he has written another letter,
this time to CMS. He also hopes to talk again with CMS
representatives and said he’s “going to talk to others on the Hill
and in the administration.”

Cramton did an exhaustive analysis of the contract suppliers in
each competitive bidding
area and product category after the Round 1
bid winners were announced Nov. 3.

He said Friday he is alarmed by what he found: Huge nationals
and small independents alike with significant market share and
experience in all product categories in all nine CBAs are
frequently out, replaced in many instances by unknown
providers.

The numbers are scary according to Cramton’s report:

• 87 percent of existing providers in mail-order diabetic
  supplies lost contracts (100 percent in five CBAS);
• 84 percent lost in complex rehab equipment (Group 2);
• 83 percent in standard power wheelchairs and scooters;
• 77 percent in enteral nutrients;
• 75 percent in hospital beds;
• 66 percent in walkers; and
• 56 percent in CPAP.

In the support surface category (Miami only), 98 percent of
existing providers lost contracts, the analysis showed. The “best”
showing, according to Cramton’s analysis, is in the oxygen
category, which came out at a 50-50 split between existing and new
suppliers.

“They went from very large market share to zero,” Cramton said,
referring to many providers who had a large presence in the bidding
areas.

And who are some of the new suppliers, several of whom are
listed by an individual’s name? “It’s been extremely difficult to
ascertain who [the winning] parties are, who owns them, their track
record. All these things should be publicly available,” Cramton
said. He has requested more information from CMS, but as yet, has
heard nothing, he said.

“My biggest concern is turning the whole market upside down,”
said Cramton, noting that the current fee-for-service model with
established providers supplying products and services has been
hurled out the window. “All of a sudden, we have this bizarre
auction. We’ve got all these new players and certainly it seems, in
many cases, that they have little or no experience and have not
provided the services anywhere near the level of the existing
providers.”

Before the rebid contracts were announced, Cramton had already
taken his concerns to CMS in person. On Nov. 1, he and Larry
Ausubel, also a professor of economics at the University of
Maryland and, like Cramton, a well-seasoned designer of auctions
worldwide, met with Jonathan Blum, deputy administrator and
director of CMS’ Center for Medicare. They spent an hour with Blum
and his team — some members via video from Baltimore —
explaining their concerns with the bidding program.

“Quite naturally, [CMS has] invested a lot in their current
approach. So it would be natural that they would be defensive
— and they were very defensive,” Cramton said of the
meeting.

Cramton also said Blum and his team thought it was too late for
the economists to bring up problems in the program’s design. “I
recognized that we were coming in at the 13th hour, but
nevertheless, these are serious problems and they need to be
fixed,” Cramton said.

The economist compared the CMS bidding program to a train
hurtling down the track toward a tunnel that is not finished. “It
is going to crash into a wall if this is not fixed,” he said. “It
is a lot more costly to clean up the train wreck than to fix the
tunnel … I think CMS would be much better off and the
Medicare beneficiaries and the taxpayers would be if they would
push forward with innovation with respect to market methods and
latest technologies rather than responding to fire after fire,
train wreck after train wreck,” he added.

But Blum dismissed the economists’ concerns. On a media call
announcing the bid winners, he told reporters, “The fact that 92
percent of those who were awarded contracts signed gives me
confidence in our program design … I believe our model is
superior to other recommendations that are out there.”

“How could he?” asked a flabbergasted Cramton. “When we see
glaring flaws, I think that is something that he should step back
and say, ‘Maybe we should listen to the experts.’”

Overall, Cramton said of his meeting with CMS, “I was
disappointed that we hadn’t moved beyond the problems to the
solutions.” That prompted him to write a follow-up letter to Blum
on Nov. 5, reiterating the program’s design flaws and expanding on
its ramifications.

“It is important that the program be stopped before its Jan. 1
start date to prevent harm to Medicare beneficiaries,” he wrote,
adding, “Continuing full-steam ahead in light of the problems with
the Round 1 (rebid) is counter to the public interest and common
sense.”

As to Blum’s contention that the contract acceptance rate gives
confidence in the program, Cramton wrote, “The acceptance rate
— 92 percent or otherwise — is a poor measure of
performance and certainly inadequate to conclude that the program
does not require redesign. The number is extremely misleading,
since it is not weighted by supplier capacity nor does it control
for supplier experience and quality … The high acceptance
rate likely is nothing more than a statement that among the
winners, there is a high frequency of 1) small suppliers, 2)
desperate suppliers, or 3) fraudulent suppliers.”

While there are assuredly high-quality suppliers among the
contract holders, Cramton said, they will likely not be able to
overcome the program’s significant flaws.

“In the short run, CMS may be able to obtain agreement from
winning bidders to perform the work. But to deal with below-cost
prices, the suppliers will ultimately have to subsidize the
contract from other parts of their business, cut corners on
quality, not deliver promised supplies or engage in fraud,” Cramton
predicts in his Nov. 5 letter.

“This is where I am so troubled with the lack of transparency,”
Cramton told HomeCare. “It is the lack of transparency
that prevents people like myself from seeing what is going on and
evaluating whether there is a serious problem.”

CMS said it will closely monitor the program’s success, but
Cramton questions the agency’s self-monitoring. “CMS has done some
evaluations of their program, but the people that did the
evaluation are the same people that did the initial design. That’s
not the right approach,” he said.

It comes back to transparency — or the lack of it. Cramton
addressed the issue with Blum, he said. “The response from Blum was
that they need to keep things secret because of the procurement
process. That’s just not the case,” Cramton said. “There’s lots of
information that can be revealed, that promotes competition.
Generally, the party administering an auction should err on the
side of excessive transparency, not excessive secrecy.”

The economist said he has not yet heard back from Blum.

“I’m still hopeful,” he said. “I’m an optimist … It’s not
over. I’m actually quite determined and think that good things
happen if one persists.”

See Cramton’s full analysis of the bid winners.

View more competitive bidding
stories.