It Ain’t Over ‘Til It’s Over

With the go-live date for the “competitive” bidding program in nine areas across the country fast approaching, attention to this controversial program is growing in Congress. At press time, CMS had not yet announced the names of the contractors; that information will be important in determining whether Congress intervenes before January 1.

One critical development is a recent letter signed by over 160 economists from prestigious universities. Separate from the industry, these economists wrote to Congress about the fatal flaws in the bidding program that CMS has constructed. While the economists did state that competitive bidding can be an effective tool to control costs without sacrificing quality, they said the current program, as CMS has designed it, will result in “a failed government program.”

Key comments from their letter follow:

• “The first problem is that the auction rules violate a basic principle of auction design: bids must be binding commitments. In the Medicare auction, bidders are not bound by their bids. Any auction winner can decline to sign a supply contract following the auction. This undermines the credibility of bids, and encourages low-ball bids in which the supplier acquires at no cost the option to sign a supply contract.”
• “The second problem is a flawed pricing rule. As is standard in multi-unit procurement auctions, bids are sorted from lowest to highest, and winners are selected, lowest bid first, until the cumulative supply quantity equals the estimated demand. What is odd is that rather than paying winners the clearing price (the last-accepted bid), the auction pays winners the unweighted median among the winning bids. “This is unique in our collective experience. The result is that fifty percent of the winning bidders are offered a contract price less than their bids. This median pricing rule further encourages low-ball bids, since a low bid guarantees winning, does not affect the price and gives the supplier a free option to sign a supply contract. Even if suppliers bid their true costs, up to one-half of the winning suppliers would reject the supply contract and the government would be left with insufficient supply. Others may accept the contract and cross-subsidize public patients with the revenue from private patients, or just take a loss. This pricing rule does not develop a sustainable competitive bidding process or healthy supplier pool.”
• “The third problem arises from the use of composite bids, an average of a bidder’s bids across many products weighted by government estimated demand. This provides strong incentives to distort bids away from costs — the problem of bid skewing. Bidders bid low on products where the government overestimated demand and high on products where the government underestimated demand. As a result, prices for individual products are not closely related to costs. Bid skewing is especially problematic in this setting, since the divergence between costs and prices likely will result in selective fulfillment of customer orders. Orders for low-priced products are apt to go unfilled.”
• “The fourth problem is a lack of transparency. It is unclear how quantities associated with each bidder are determined … Bids from the last auction event were taken in November 2009, and now more than ten months later, we still do not know who won contracts. Both quality standards and performance obligations are unclear. This lack of transparency is unacceptable in a government auction and is in sharp contrast to well-run government auctions … “This collection of problems suggests that the program over time may degenerate into a ‘race to the bottom’ in which suppliers become increasingly unreliable, product and service quality deteriorates, and supply shortages become common. Contract enforcement would become increasingly difficult and fraud and abuse would grow.”

Whether Congress will step in and require CMS to change the course of the competitive bid program remains to be seen. What is clear is that 257 cosponsors of the House bill that would repeal the program (H.R. 3790) and continued congressional oversight signal that a good percentage of members of Congress are keenly interested in how the bid program will impact their communities.

Read more Washington Wit & Wisdom columns. View more competitive bidding stories.

A specialist in health care legislation, regulations and government relations, Cara C. Bachenheimer is vice president, government relations, for Invacare Corp., Elyria, Ohio. Bachenheimer previously worked at the law firm of Epstein, Becker & Green in Washington, D.C., and at the American Association for Homecare and the Health Industry Distributors Association. You can reach her at 440/329-6226 or [email protected].