Could You Live With It?

The Centers for Medicare and Medicaid Services’ DMEPOS competitive bidding project has been rolling along — merrily, according to CMS — since Jan. 1, but via conference calls and meetings across the nation, home medical equipment providers are still trying to find a way to stop it before it kills the industry — or people.

They are not alone.

From his office at the University of Maryland, economist Peter Cramton is waging a battle to reform what he and scores of other experts have determined is a fatally flawed design that fails to meet any of the best standards related to auction (competitive bidding) science. With research funding from the National Science Foundation and the University of Maryland and input from many quarters, including HME providers, Cramton has put together a redesigned competitive bidding proposal that addresses the CMS project’s myriad defects.

It also adheres to the standards for regulation set down by President Obama in a Jan. 18 executive order, while CMS’ current program violates every principle, he says.

So far, neither CMS nor the HME community has embraced it, but Cramton, driven by what he believes is a wrong that must be corrected before it does irreparable damage to an industry and to Medicare beneficiaries, is not giving up. Already, reports are surfacing about companies closing or refusing to serve beneficiaries, longer hospital stays and job layoffs. Under the CMS bidding design, the outcomes promise to worsen over time, Cramton says, and though the margin of time for action is dwindling, it’s not yet gone.

“There is still time to act,” he says. “CMS can still change things.”

Cramton entered the picture last fall, when former Rep. Nancy L. Johnson (R-Conn., 1983-2007) asked him to take a look at the auction rules.

“I saw very serious troubles right away,” Cramton says. “I actually think auctions can be very effective when used properly. I am simply motivated by making the system work and work very well for all the participants.”

It was apparent to him that the CMS project was not designed to do that. He was so alarmed after studying it, in fact, that he spearheaded a letter to Capitol Hill in September signed by 166 world-renowned economists detailing the plan’s fatal flaws.

The experts cited four major problems:

1. The CMS program rules violate a basic principle of auction design in that bids are not binding commitments.
2. The pricing rule is flawed because 50 percent of the winning bidders are offered a contract price lower than they bid, and it encourages lowball bids.
3. The use of composite bids “provides strong incentives to distort bids away from costs” (bid skewing).
4. There is a lack of transparency in how quantities associated with each bidder are determined, in quality standards and in performance obligations.

The letter also reached CMS, which largely dismissed it.

“I believe our model is superior to other recommendations that are out there,” Jonathan Blum, deputy administrator and director, Center for Medicare, told reporters on a media call in November.

Cramton: A Good Design Could Work

But the CMS design troubled Cramton so much that he embarked on his redesign. The idea: to illustrate how a properly designed project would operate and benefit both CMS and bidders. What he came up with is a radical departure from the CMS project.

“What I am proposing is based on the most basic auction principles,” he says, noting that his design also follows those in Obama’s executive order: that government regulations should be cost effective and cost-driven, transparent, coordinated and simplified, flexible, science-driven and necessary and up to date.

“[The president’s order] lists five or six extremely sensible principles of regulation and with respect to every one of them, I would grade the current CMS bidding proposal as an ‘F,’” Cramton says. “My proposal attempts to address each of the principles head on.”

He is advocating using his redesign not for Round 1 — best to halt that and return to the traditional administrative model for the time being, he says — but for the next round, which is scheduled to be bid this year.

“The focus is on Round 2 as a redesign,” Cramton says. “I continue to communicate with [CMS] and I am also communicating with others in Health and Human Services and I am talking with people in the White House and elsewhere in the administration and the Congressional Budget Office, as well as Congress.”

To date, he hasn’t gotten a lot of traction.

“CMS has had an opportunity to meet with Dr. Cramton and review his proposal for a redesign of the program,” a CMS spokesman told HomeCare in January. “CMS always appreciates suggestions for program improvements and evaluates them on a wide range of factors, such as the law, public policy objectives and overall feasibility. We made numerous improvements to the program in the current Round 1 rebid.”

The spokesman also noted that CMS was pleased with how the competitive bidding program was working, stating, “We are monitoring the program closely and things are going well.”

“I get lots and lots of support whenever an economist is in the room because they understand the nature of the problem and why it needs to be fixed,” Cramton says wryly. “When there isn’t, it is very frustrating at how much bureaucratic inertia there is.”

That is not discouraging Cramton at all, however. “I am going to keep at it and I am quite optimistic,” he says.

He’s aware that most in the HME industry support a full repeal — not a redesign — of the CMS project, even though a repeal could cost the industry as much as $20 billion. Competitive bidding, stakeholders believe, does not lend itself well to a service-oriented industry that focuses on individualized care.

“Many [providers] have been very encouraging, enthusiastic and supportive and have supplied data and knowledge about the industry,” says Cramton. “Still, many HME providers think that their first choice is ‘let’s just repeal this and get back to administrative pricing.’”

He believes that is unlikely to happen.

“How long have we had for a repeal and it hasn’t happened?” he says. “Now, looking at the political agenda, it seems even more remote. With changes in the House, they are looking for even more market methods. So it seems a repeal won’t happen and what would it look like if it did happen? I would rather have prices reduced if I were a supplier based on fundamental economics. If you are an efficient provider, you are much better off with an efficient auction. The efficient auction guarantees long-run stability.”

Advocates: Bidding for HME Just Isn’t Right

Wayne Stanfield, president and CEO of the National Association of Independent Medical Equipment Suppliers, remains unconvinced.

“We do not believe that a redesigned bidding program is the right thing for DME or for any portion of health care,” he says. “While I think it is possible to design a program that would work for commodity-based products, we are not a commodity-based industry; we’re a care-based industry, and even the smallest piece of equipment has a care element to it.

“To auction something that has a care element is an unknown because the care from one patient to another patient is completely different, and that degree of difference varies depending on the product category,” he continues. “For oxygen … for example, there is a huge difference between one patient who manages their own care because they are mobile and another one who can’t change their tanks for themselves. So our position is that while we believe it is possible to design auction processes that could work, we don’t think there is a place for that in the health care arena.”

But Cramton says the service component is not foreign or incompatible with an auction, even for health care.

“In fact, it is quite common for products to have a service component,” he says. “The service/quality component is more the norm than the exception. It does mean that there need to be standards of service and quality. “

That would require CMS to be explicit about the service that would accompany every product, he adds.

“This requires some work, but this is a requirement in any sensible procurement process, whether by auction or administrative pricing. There also needs to be a process to see if the performance obligations have been met and what actions are taken if they are not met. Again, this is a requirement of any procurement process.”

Cramton also notes that under an efficient auction process, a provider would make more money serving some customers, less money on others and perhaps lose a little on still others. “But you take that into account in your bid,” he says, noting that it is called “cross subsidy” in the auction world.

How the Plan Works

So how would Cramton’s auction redesign work? To begin with, the timeframe is highly condensed versus CMS’ design. Here’s his timeline:

• Two months before the auction, the bidder information package is made available.
• One month before the auction, potential bidders submit all qualification materials except the financial guarantee.
• Two weeks before the auction, the qualified bidders are announced. (Banking and capital markets determine worthy providers, not CMS.)
• One week before the auction, each qualified bidder submits a bid bond proportional to the bidder’s capacity.
• The auction would take place about three months before the commitment period.

In another major departure, bidding would be online in real time over two days.

“It’s highly transparent and a much easier bidding process,” Cramton says, noting the time for the actual auction addresses one of the major flaws in CMS’ design. “At the conclusion of the auction, all the bidders know immediately what they have won and at what prices.”

An auction that takes two days? Bidders in CMS’ Round 1 rebid waited months before they learned they had won.

“The first time around, it might take two days, but I would expect that after the first time, it could be done more quickly and could be done in a day,” says Cramton. “I based that on my experience with other auctions of similar size. Typically, you could have about 12 rounds of bidding. And the auctioneer can adjust the size of the bid to guarantee it would end after 12 rounds or so.”

Bidding would be through what is called a “descending clock” auction:

• An auctioneer announces starting prices.
• HME providers choose “in” or “out” for each category and service area. (Once a bidder exits a particular service area and product category, the bidder cannot return to that product category in that service area.)
• Excess supply is determined.
• The auctioneer announces a lower price if there is excess supply.
• The process continues until supply equals demand.

Bids are binding commitments, which addresses yet another of the flaws in the CMS program, and the end price paid to all HME providers is the “clearing price” that balances supply and demand, Cramton explains.

His redesign also gets rid of CMS’ median pricing feature, which guarantees that 50 percent of bidders offered contracts receive less than they bid. Under the CMS bid, Cramton reminds, “Despite a bid of $50, the provider is asked to supply at $30, inconsistent with the provider’s offer to furnish.”

In his scenario, the auction determines the price of each “lead product” — the product with the greatest dollar volume based on 2009 data — in each category; other individual product prices are determined from the relative price index. An example: If an oxygen concentrator equals $100, portable gas cylinders have a relative price of 15 percent, so are priced at $15.

The relative price index is one of the features he customized for the HME industry, Cramton says. “What that does is enormously simplify the auction, so rather than dealing with thousands of prices, we are dealing with a much smaller number of prices. If you win a product category, you will be required to provide all the products in that category. It avoids the bid-skewing problems, which were present in the current approach.”

He also believes that product categories included in the auction need stronger scrutiny. “It is very important to look at all those product categories and make sure they are sensibly defined,” he says. “My guess is that we need to go back and look at those products, and some will need to be dropped, some will need to be added.”

By ensuring that the product categories are correct, selective fulfillment — something Cramton says he feared with the CMS project and which has already been reported to be happening — will not be an issue because providers will know exactly what they are bidding on.

That makes it an easier process for bidders, Cramton says, because those interested in a particular category can focus on that category in all areas; bidders interested in a particular service area can focus on that area in all categories; and bidders with other interests can focus on the most relevant categories and areas for them.

The redesign also addresses the capacity issue, which remains a mystery in the CMS bid; industry stakeholders are still unsure how the agency calculated capacity for the Round 1 rebid. In Cramton’s auction, each HME provider would be assigned a capacity based on its supply for the category and service area in the prior three years, with the most recent year given the most weight.

“This is very different from the current system where we don’t actually know how CMS is determining capacity … The problem with that is that it makes the pool very arbitrary,” Cramton says. “They can do what they want; we don’t know what they are doing.”

Auction Options and Market Stability

The economist says the auction could be conducted in two ways. Under a “100 percent” auction, 100 percent of the country would be auctioned on a rotating basis:

• Each year, one-third of the country’s service areas (comprised of West, Central and East, where areas with geographic similarities are grouped) are auctioned with three-year contracts. Auctioning one area a year establishes competitive prices in that area for three years and gives an incentive to stay in the auction, because losers are excluded from supply.
• A variation would be that each year, half of the country would be auctioned with two-year contracts, resulting in a shorter commitment period that would encourage flexibility and entry, Cramton believes.

He says that with a 100 percent auction, non-winners would be excluded as they are in the CMS project, but he contends “you actually have a lot more control over what you do win. It turns into a very active decision as to what areas do I want to do.”

In the variation, he says, “We auction a smaller percentage. I suggest 10 percent each year. So then over the two-year contract period, we’d have 20 percent of the country auctioned. Those who are losers would be excluded from supplying, but they would be free to supply in 80 percent of the country.

“That maintains stability of the market structure over time,” Cramton continues. “That helps the supplier make employment commitments and other decisions. That is actually my first choice.”

Cramton says he does not know exactly how much CMS would save by implementing his redesign, but he thinks it would be “a lot of money. My experience is that when you do things the wrong way, it can be very expensive. You’re handling complaints, doing redesigns, managing fraud and abuse.

“[CMS has] worked on this for over 13 years, done very expensive field tests, and the reality is that a proper auction can be implemented for an extremely low cost relative to the savings. I would envision that implementation costs would be a net savings of many millions of dollars.”

And what would providers gain?

“I am pretty sure that some prices will go up and some prices will come down, but I do know that they would be the sustainable prices you get with an efficient auction,” Cramton says.

They would also have peace of mind that CMS was not manipulating prices or capacity. Under his plan, he says, “Bidders have the right incentives for revealing what things cost, and on the CMS side, they have all the important elements that are objectively determined, so there is no scope for them to engage in any kind of manipulation. And with all that transparency, fraud or corruption is extremely difficult, especially with a market monitor looking over everything to make sure that doesn’t happen.

“That’s the beauty of it,” he continues. “At the end of the day, the bidders know what they have won and if they have won. So as a bidder who walks away, it makes perfect sense to me. I understand that prices were bid down by legitimate competitive bids, by viable providers who now have performance obligations they must honor.”

We Need to Stop the Train Wreck

Cramton recently returned from Australia, and the government there is interested in his design for its health market, he reveals. “If they move quickly, they can get it implemented in Australia and have the U.S. follow,” he says dryly.

He knows that halting the current program would be an embarrassment to CMS. “There is nothing that CMS can do to avoid embarrassment. What they have now is embarrassing,” he says. “But they can avoid the train wreck. Now that they have been informed that the train is running toward a tunnel blocked by a huge boulder, it is time to put the brakes on. Once that train hits the rock, it is not going to be pretty.”

So he continues to try to stop the train.

“It’s an extremely important problem, and it is just so clear to me and many others that there are problems and they can be fixed,” he says.

“That is why I am so engaged in this as an academic and a practitioner, too. I want to try to use my skills and expertise to make the world a better place, and I think this is a tremendous use of my time. I do think that, ultimately, I will be successful in prompting some important change. It may take a while, but I am patient. I have lived in Washington for 20 years now.”

To view Peter Cramton’s complete redesign proposal, visit his website at www.cramton.umd.edu, choose “Health care” under “Papers,” then “Auction Design for Medicare Durable Medical Equipment.”

View more competitive bidding stories.

• Read the “Trial Auction?” sidebar to learn about the demonstration project that Cramton proposes.
• Read the “Looking for Alternatives” sidebar to learn what alternatives the industry is reviewing.

Trial Auction?

The best way for both CMS and providers to see how his process would really work would be to have a demonstration project, says economist Peter Cramton.

“One of the things I am working on now — and it is in the very early stages — is to get everybody’s greater comfort with the approach. What I would like to do is have a demonstration of the auction,” he says. “We would bring together all the stakeholders — CMS, the administration, Congress, HME providers, representatives of the Medicare beneficiary community — and actually do an auction.”

The goal wouldn’t be financial but rather educational, he says. He is confident that the end result would be an acknowledgement by providers that an auction would work and would work well for HME.

“This is something I have done in a number of other industries and countries. It is extremely helpful for everybody involved, including the market designers,” Cramton says. “They see how it works, they get comfort with it. It is very realistic, just like they would see a real auction, and there can be a lot of dialog, like how it can be improved, what details need to be hammered out before it is implemented. That is what I am proposing to CMS and others.”

And what if CMS won’t come to the party?

“If they are not open enough, it can be done without them,” Cramton says. “It would be nice to have them at the table, but if they don’t want to be, they don’t have to be.”

Looking for Alternatives

As the industry sinks deeper into competitive bidding, stakeholders are still determined to fight for repeal of the program, and at presstime, planned to do that during the American Association for Homecare’s Washington lobbying day in March.

At the same time, a brain trust of HME thought-leaders assembled by the association is working on other strategies for dealing with the CMS project.

“One of our member work groups is looking at alternative payment systems for HME that don’t involve competitive bidding in any shape or form,” says Michael Reinemer, AAHomecare vice president, communications and policy. “Another group is looking at ways that might be acceptable within a bidding framework, perhaps starting from scratch on a completely new approach.”

Georgie Blackburn, vice president of government relations for Blackburn’s in Tarentum, Pa., and co-chair of the alternative ideas work group, says the intent is to “drive the best ideas forward.” “When you have a poor policy, something surfaces sometime, and it is our hope to be there with some possibilities,” she says.

While it is still early, AAHomecare reported in January that it had recorded nearly 100 complaints tied to the CMS program, including difficulty finding an equipment provider, longer-than-necessary hospital stays due to confusion in discharging patients and incorrect information provided by Medicare.

But Wayne Stanfield, president and CEO of NAIMES, called the problems being reported in the competitive bidding areas “a trickle, not the expected flood.” He added that among the reasons — other than people not knowing how or where to report problems — are bid winners “throwing full efforts behind making competitive bidding work.” Another reason for the slow reports, he says, “is the caring compassion of the suppliers without contracts who are helping patients by providing uncompensated services.”

Stanfield, a member of the alternative strategy task force, says “there are only two things that can come out at this point — it’s either going to fail or it’s not. If it fails, it will mandate that Congress do something.” He defines failure of the bid program as “enough chaos and catastrophes that it gets to Congress and they say, ‘Oh, my God, what have we done?’”

At that point, Stanfield says, “If this industry does not have a plan in its pocket when that occurs, we will have missed the only opportunity we have.”

Adds Blackburn, “We want to have alternatives that are saleable to Congress, to CMS, that [show] they will save money while we can preserve jobs and give the care we are accustomed to providing.

“This is our business, these are our patients. We aren’t just going to be spoon-fed this policy.”