Cramton Calls for Presidential Action on Competitive Bidding

COLLEGE PARK, Md. — In what one stakeholder termed “the
strongest case yet” against competitive bidding, economist
Peter Cramton wrote a letter to President Barack Obama underscoring
the fatal flaws in CMS’ bidding design and asking for presidential
involvement in getting the program redrawn. The letter, sent
Friday, was signed by 244 auction design experts.

“Given the disregard by [the Centers for Medicare and Medicaid
Services] of the market design recommendations received from
recognized experts, we call upon the executive branch to direct CMS
to proceed otherwise,” read the letter, which was copied to Health
and Human Services Secretary Kathleen Sebelius, the White House
Office of Information and Regulatory Affairs and the President’s
Council of Economic Advisors.

“We also ask that you consider supporting new legislation that
requires the Secretary of Health and Human Services to conduct
efficient Medicare auctions, consistent with the best practice and
the best science,” the letter added.

The letter is the latest volley in Cramton’s battle to get CMS
to address the major defects in its competitive bidding design.
Those efforts began in September, when Cramton, an economics
professor at the University of Maryland, sent a letter
signed by 166 other renowned auction experts to Congress
detailing the program’s deficiencies and calling for its
implementation to be halted.

CMS brushed aside concerns expressed by members of Congress,
implementing the program — as designed — in January in
nine competitive bidding areas across the country. Cramton and the
scores of other economists continued their crusade, holding
meetings with powerbrokers, congressional briefings and a mock
auction attended by home medical equipment providers,
economists and even some CMS officials.

Earlier this month, Cramton
drafted legislative language calling for the current program to
be halted and redesigned according to accepted auction practices,
not by CMS but by an independent market monitor. According to his
plan, the new auction would be implemented in 2013.

His hope is that the language can be turned into a bill and
ultimately passed by Congress.

Cramton said the letter to the president is yet another attempt
to get some action.

“Today’s letter from many distinguished economists, computer
scientists, and engineers, including four Nobel Prize winners in
economics, is sent as a result of CMS’ failure to reform the flawed
auctions,” Cramton told HomeCare Friday.

“I directed the letter to President Obama because I believe that
support of the administration is important to speed reform of the
Medicare auctions,” he added, noting he believes the design work
must be led by HHS, not CMS. “Of course, the letter also went to
leaders in both the Senate and the House. I remain convinced that
we need a legislative solution. CMS needs strong guidance from
Congress.

“My hope,” Cramton continued, “is that when 244 distinguished
experts, including four Nobel Laureates, present such a strong
letter in favor of reform, both the administration and the Congress
will take notice and do what is right, especially since everyone
benefits from reform (except those engaged in fraud and
corruption).”

In spite of the fact that the industry has been largely against
any type of competitive bidding for HME, advocates applauded the
newest letter.

“This is the strongest case yet made for CMS and Congress to
take action to end the current program,” Wayne Stanfield, president
and CEO of the National Association of Independent Medical
Equipment Suppliers, told members in a NAIMES news bulletin.

“It’s important to keep the pressure up,” said Cara
Bachenheimer, senior vice president of government relations for
Elyria, Ohio-based Invacare. “The new message is that he is
frustrated that he has been stonewalled by CMS and is appealing to
a higher order to step in and get this fixed. It’s absolutely a
good thing. He is a very credible spokesperson.”

Whether or not providers support Cramton’s idea of reforming the
design and re-implementing competitive bidding, Bachenheimer said,
“he does a great job of pointing out how flawed the program is and
how immune CMS is to [efforts to change it]. This is the most
useful thing — we need to use it to amplify the noise
level.”

That’s imperative because so much is clamoring for attention on
Capital Hill — the economy, the budget deficit, health reform
— that it’s hard for the competitive bidding issue to gain
attention, she said. Does she think in the end the president will
respond to amped up noise level and step in?

“He is the president, he is the head of the executive branch. He
would certainly have the power to make significant changes for
Round 2,” Bachenheimer said. “That could be done through
regulation. He could tell CMS they need to fix this program
according to these economists’ recommendations. Theoretically, yes,
the president’s office could do something, but I am not holding my
breath on that.”

Still, she said, it is crucial for the industry to add its voice
to those of the economists in underscoring the disastrous effects
of the fatally flawed project.

“The noise level is so critical,” said Bachenheimer. “Don’t
under estimate CMS’ PR capabilities. They keep littering the Hill
with the message that everything is great. When Congress doesn’t
hear anything else, that’s what they believe.

“Grassroots has proven successful for us in the past, and it
could be successful for us in the future,” she added.

The full text of Cramton’s letter to the president follows:

Dear President Obama,

We are economists, computer scientists and engineers with
expertise in the theory and practice of auctions. In September
2010, many of us signed a letter to Congressional leaders pointing
out the numerous fatal flaws in the current Medicare competitive
bidding program for durable medical equipment (DME). We also
emphasized that the flaws could easily be fixed by adopting modern
auction methods that have been developed over the last fifteen
years and are now well understood.

The flaws in the auctions administered by the Centers for
Medicare and Medicaid Services (CMS) are numerous. The use of
non-binding bids together with setting the price equal to the
median of the winning bids provides a strong incentive for low-ball
bids-submitting bids dramatically below actual cost. This leads to
complete market failure in theory and partial market failure in the
lab. Another problem is the lack of transparency. For example,
bidder quantities are chosen arbitrarily by CMS, enabling a wide
range of prices to emerge that have no relation to competitive
market prices.

We write today, nine months later, to report that —
much to our dismay — there are to date no signs that CMS has
responded to the professional opinions of auction experts or taken
any serious steps to fix the obvious flaws to the competitive
bidding program. Rather CMS continues to recite the mantra that all
is well and that CMS does not plan to make any changes to the
program as it expands from nine pilots to the entire United
States.

We find this especially distressing and unreasonable given
your Executive Order of 18 January 2011 on regulation. In that
order, you lay out numerous sensible principles of regulation that
administrative agencies must follow. The CMS competitive bidding
program violates all of the principles, 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.

Since the writing of our letter in September, several of us
have done further detailed scientific study to explore the
properties of the CMS design and contrast it to modern efficient
auctions. The findings are dramatic and illustrate the power of
science to inform auction design. Specifically, auction theory was
used to demonstrate the poor incentive properties of the CMS design
and how these lead to poor outcomes. Laboratory experiments were
conducted at Caltech and the University of Maryland that
demonstrate that these poor theoretical properties are observed in
the lab. Moreover, simple efficient auctions perform extremely well
in both theory and in the economic laboratory. Finally, some of us
have studied extensively the Medicare setting, speaking with
hundreds of DME providers and beneficiaries, and have developed a
modern auction design for the setting that is consistent with the
best practice and market design methodologies.

This design step was far from a theoretical exercise. On 1
April 2011, a Medicare auction conference was conducted at the
University of Maryland to show how the modern auction methods work
and to conduct a nearly full-scale demonstration of an efficient
auction. Over 100 leaders in government and the DME industry
attended the event. The results are documented at
www.cramton.umd.edu/health-care, including a complete video and
transcript of the event. The mock auction achieved an auction
efficiency of 97%. In sharp contrast, the CMS auction exhibited
efficiencies well below 50 in the laboratory, even in simplified
environments. Despite these sharp results, CMS continues to assert
that all is well and that no significant changes are
required.

The problems with the CMS auction grow worse upon closer
inspection. The complete lack of transparency is inappropriate for
a government auction. For example, we now know that CMS has almost
complete discretion with respect to setting prices in a
nontransparent way. CMS can and did manipulate the quantities
reported by bidders during qualification. These quantities are
essential to forming the supply curve, which ultimately sets the
price in each product-region. To this date we know little about
what quantities were used in the price determination. As a result
of this lack of transparency, it is now clear that the CMS design
is not an auction at all but an arbitrary pricing process.

Given that nine months have passed and given the disregard
by CMS of the market design recommendations received from
recognized experts, we call upon the executive branch to direct CMS
to proceed otherwise. We also ask that you consider supporting new
legislation that requires the Secretary of Health and Human
Services to conduct efficient Medicare auctions, consistent with
the best practice and the best science.

There is much at stake. Unfunded Medicare expenses are
estimated to be in the tens of trillions of dollars going forward.
Medicare is unsustainable without the introduction of innovative
market methods and other fundamental reforms. The DME auction
program represents an important first step, especially since
failures in homecare will inevitably lead to much more expensive
care at the hospital.

We believe that proper design and implementation of market
methods can bring gains to all interested parties: Medicare
beneficiaries benefit from receiving the quality goods and services
they need, Medicare providers benefit from being paid sustainable
competitive prices for the quality goods and services they deliver,
taxpayers benefit by paying the least-cost sustainable prices for
these products, and CMS benefits from the numerous efficiencies
that result from conducting an effective program, largely free of
complaint, fraud, and corruption.

We believe that government plays an important role in
establishing effective market rules. For the Medicare auctions, the
impediments to reform are not special interests or a lack of
knowledge, but bureaucratic inertia. This is an important setting
and change of the prior administration’s regulations is required to
contain Medicare costs and assure quality services for Medicare
beneficiaries. We are counting on your leadership to bring
effective reform.

Many thanks for your thoughtful consideration of our
concerns.

Sincerely,

(Followed by 244 signatures)

Download a PDF of the letter and signatures.

View more competitive bidding
stories.