Cramton Outlines New Bid Plan, Calls for Round 1 ‘Time-Out’

ARLINGTON, Va. — Last week, economist Peter Cramton
presented his plan for a new design of competitive bidding and said
Round 1 of the program should be stopped to “come up with an
approach that works and works well.”

During a Dec. 15 teleconference hosted by the American
Association for Homecare, Cramton reiterated his criticisms of the
program that CMS will implement on Jan. 1. The University of
Maryland professor maintains the current program was designed with
a number of fatal flaws — among them non-binding bids —
that will cause it to fail.

But since spearheading a September letter to
Congress from 167 top economists about the program’s
shortcomings, Cramton has also emphasized that he believes
competitive bidding for DMEPOS could work well if properly
designed. In fact, the economists’ letter stated, “We believe that
competitive bidding can be an effective method of controlling
Medicare costs without sacrificing quality. However, the current
auction program has flaws that need to be fixed before it can
achieve the objectives of low costs and high quality.”

Under Cramton’s competitive bidding design:

• Bids are binding commitments.
• Each bidder provides a financial guarantee in the form of a bid
  bond or a deposit in proportion to the bidder’s capacity.
• Capacity is objectively estimated based on the bidder’s supply
  in recent years, with the most recent year given the most
  weight.
• Each winner provides a performance guarantee in proportion to
  the winner’s estimated volume won.
• The auction establishes a market clearing price for each
  product in each service area. The price paid to all suppliers is
  the clearing price that balances supply and demand.

After the auction, Cramton’s plan notes, “The winners compete
for Medicare beneficiaries by offering quality products and
services. Thus, beneficiary choice is used to further strengthen
incentives to provide high quality products and services.”

After analyzing
winners in the Round 1 rebid, Cramton told HomeCare in
an interview last month he was alarmed to find that in all nine
product categories across the competitive bidding areas, at least
half or more of the existing providers will be replaced in many
instances by unknown entities. In mail order diabetic supplies, for
example, Cramton’s analysis showed that 87 percent of existing
providers lost contracts (100 percent in five CBAs), while 84
percent lost in complex rehab and 83 percent in standard power
wheelchairs and scooters.

Cramton has met with CMS officials to express his concerns about
the bidding program and has had discussions with others at HHS to
present his ideas about its redesign.

According to a report from AAHomecare, Cramton doesn’t think
CMS’ current program can be “tweaked” into a viable design, and he
called for a 12-month “time-out” of Round 1 via an administrative
delay to allow an overhaul of the program.

AAHomecare held the teleconference, which had more than 150
participants, “because the economists’ concerns about the bid
program have had a significant impact in policy debate,” said
Michael Reinemer, vice president, communications and policy. “It
was important to give AAHomecare leadership, council members and
state leaders an opportunity to hear directly from Cramton and ask
questions and make comments.” Reinemer added that the association
doesn’t have a position on the Cramton proposal.

“In drawing attention to flaws in the CMS system, Dr. Cramton’s
ideas and auction proposal have effectively been thrust into the
public policy arena on Capitol Hill, at CMS, and within the HME
community,” Tyler Wilson, AAHomecare president, said after the
call. “Whether you like the proposal or not, the reality is that
because of Cramton’s authority as an expert, his views have
credibility.

“It’s important that the HME community be knowledgeable and
well-versed in what Dr. Cramton is proposing,” Wilson continued.
“If the consensus within the HME community is that his proposal is
the wrong approach for the industry and bad for beneficiaries, it
becomes all the more incumbent upon HME companies and AAHomecare to
develop an alternative pricing mechanism that does not involve
auctions and bidding.

“If the current bidding system fails,” Wilson said, “Congress is
going to be seeking alternative approaches. The HME sector needs to
have that alternative ready to offer up when and if disruption
ensues.”

For a working paper on Cramton’s competitive bidding plan, see
www.cramton.umd.edu/auction-papers-with-abstracts.htm#Medicare.

View more competitive bidding
stories.