Economists: Competitive Bidding Program Will Fail

ATLANTA — CMS and Congress, are you listening? The voices
against DMEPOS competitive
bidding are growing louder as independent experts continue to
raise serious concerns about the Medicare bidding program, with one
economist calling it “truly horrible.”

In a letter addressed to Chairman Pete Stark, D-Calif., 166
self-described “economists, computer scientists and operation
researchers with expertise in the theory and practice of auctions”
submitted comments on the program to the House Ways and Means
Subcommittee on Health, which is expected to hold a hearing on
competitive bidding when Congress returns to Washington after the
November elections.

In their comments to the House subcommittee, the letter’s
signatories — many among them from the country’s most
prestigious universities including Harvard, Princeton, Yale,
Columbia, Stanford, the University of Pennsylvania and others
— did not discard the idea of a successful competitive
bidding program but said CMS’ project needs to be fixed before it
is implemented.

“We believe that competitive bidding can be an effective method
of controlling Medicare costs without sacrificing quality,” they
wrote. “However, the current auction program has flaws that need to
be fixed before it can achieve the objectives of low cost and high
quality.”

The experts cited four main flaws:

• The rules violate a basic principle of auction design in that
  bids for the CMS project are not 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 letter states.

• The pricing rule is flawed because 50 percent of the winning
  bidders are offered a contract price lower than they bid, which
  further encourages low-ball bids. “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 … This pricing rule does not develop a sustainable
  competitive bidding process or healthy supplier pool,” according to
  the letter.

• The use of composite bids “provides strong incentives to distort
  bids away from costs” (bid skewing), the experts pointed out,
  adding that 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.”

• There is a lack of transparency in how quantities associated
  with each bidder are determined, in quality standards and in
  performance obligations. More than 10 months after the Round 1
  rebid, “we still do not know who won contracts,” the commenters
  noted. “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
  ….”

Concluded the experts: “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 deteriorate and supply shortages become common.
Contract enforcement would become increasingly difficult and fraud
and abuse would grow …

“Implementation of the current design will result in a failed
government program.”

Their comments come on the heels of a study by University of
Northern Iowa economist Ken Brown, PhD, who evaluated the effect
of competitive bidding in five rural states — Iowa,
Montana, North Dakota, Wyoming and West Virginia — and
concluded that it would have a far greater impact on quality and
beneficiary access than CMS claims.

Brett Katzman, a PhD from Kennesaw State University (Atlanta),
who signed the comments letter and who has designed competitive
bidding projects for other industries, told HomeCare that
CMS’ program is different from any other he has seen.

“I have never put one together like this or, for that matter,
ever seen one like this. It is truly horrible,” said the economist,
who has been studying the bidding project since its inception.

Katzman has several quarrels with the bidding program. “The
rules of the bidding system are based on poor economic analysis and
set unsustainable low prices. However, my biggest complaint is that
CMS has known about these problems for some time and has chosen to
simply tweak the existing rules rather than come up with a process
that is based on sound economic analysis,” Katzman said.

“What they’ve done thus far is like using Band-Aids to stop
bleeding caused by a compound fracture instead of resetting the
broken bone,” he continued. “The broken bone is the problem and
won’t get better just because Band-Aids are used to cover up a few
of the symptoms.”

It is not the first time Katzman has argued against the CMS
program. In January 2008, he and economist Kerry Anne McGeary of
Philadelphia’s Drexel University published a
study titled “Will Competitive Bidding Decrease Medicare
Prices?” in Southern Economic Journal. Their conclusion:
“It is shown that the CMS competitive bidding process (auction) is
inefficient, leads to price increases, and may cause decreases in
the quality of services.”

Katzman, along with Peter Cramton from the University of
Maryland, also argued against competitive bidding in a Sept. 14
article by John Wilkerson for Inside Health Policy. The
two long-time economists iterated the program’s fatal flaws and
said they hoped to meet with the Congressional Budget Office about
what they believe are “drastically overstated” savings
estimates.

The meeting has not occurred, Katzman said, adding, “If we ever
did meet, my main point would be that although the price decreases
achieved by competitive bidding seem to be substantial, it is
dangerous to use them to forecast future savings because the low
prices are simply not sustainable. The lack of sustainability stems
from the rather silly median pricing rule. That rule actually
encourages bids that are below costs and, obviously, if prices are
set based on below-cost bids, then they are not sustainable in the
long run.”

Although Katzman believes there is a place for competitive
bidding, he said the CMS program as it now stands should not go
forward.

“My opinion is that the program should be stopped and
redesigned. Competitive bidding can be a good thing if done
correctly,” he told HomeCare.

Read the
economists’ letter in its entirety.

View more competitive bidding
stories.