Caltech study concludes competitive bidding is badly flawed

PASADENA, Calif., June 1, 2012—Auction experts at the prestigious California Institute of Technology (Caltech) have published an academic paper concluding that Medicare’s Competitive Bidding Program is based upon a flawed design that will be difficult to fix.

In a paper published in the Quarterly Journal of Economics, Brian Merlob, Charles R. Plott and Yuanjun Zhang of Caltech reported that experiments with auction models demonstrated that competitive bidding “is not a good auction.’’

“The results reveal the existence and severity of its architectural flaws … and that the CMS auction cannot be easily fixed,’’ the study said.

The two big problems with competitive bidding are: CMS sets the price of products based upon the median of winning bids, and bids are nonbinding. Essentially, that encourages low-ball bids submitted by providers who then withdraw from the process if median bids come in below their cost. Thus, the process “fails to generate competitive prices of goods and fails to satisfy demand,” the study said.

The American Association for Homecare said the study “is another red flag among hundreds of economists about the poor design for Medicare’s auction system for home medical equipment. It underscores the need to replace the current system with a vastly improved alternative recommended by auction experts—the Market Pricing Program.”

The National Association of Independent Medical Equipment Suppliers (NAIMES) said the study showed that competitive bidding is doomed. NAIMES noted that competitive bidding has already put more than 300 HME providers out of business.

NAIMES encouraged providers to contact representatives and senators about flaws in the bidding process. “We understand that it is not the job of government to keep businesses afloat, but is it the job of government to deliberately put companies out of business?” NAIMES asked.