Cramton Study Offers Proof: Lowball Bids Cut Out Experienced Companies

COLLEGE PARK, Md. — Peter Cramton continued his crusade
against CMS’ competitive bidding design last week, releasing a
comprehensive study that bolsters auction experts’ opinion that the
program is dangerously flawed.

Using contract supplier lists issued by CMS in 2010 and PDAC
(Pricing, Data Analysis and Coding) procedure code utilization data
he obtained through the Freedom of Information Act, Cramton
compared the market structure before and after competitive bidding and
discovered disturbing changes.

“The change in market structure is dramatic,” the indefatigable
University of Maryland economics professor said in his introduction
to the 77-page study. “The vast majority of existing suppliers by
volume are excluded from supplying Medicare beneficiaries.

“This radical transformation of the industry is the result of a
fatally flawed auction design and not the outcome of an efficient
competitive process,” Cramton added.

Largest Medicare Market Share Holders Cut Out

His report looks at the 50 largest providers for each product
category based on Medicare charges from 2006 through 2010 by volume
and market share in the Round 1 competitive bidding areas. In the
most egregious cases, the analysis shows, nearly 100 percent of the
providers with the greatest market share prior to competitive
bidding were excluded when the Round 1 rebid was implemented in
January.

According to the study, for example, 97 percent of the top
market share holders in the Dallas CBA were excluded from providing
mail-order diabetic supplies; 96 percent of Kansas City’s top
market share holders were cut out of the Medicare walker market;
and in Miami, 94 percent of those who held the lion’s share of the
support surfaces market were excluded because of the CMS
program.

“The result will be immediate harm to Medicare beneficiaries and
the vast majority of Medicare providers in the nine service areas
covered by the auction,” Cramton predicted. “Beneficiaries will
face poor service, selective fulfillment of orders, fraud, and
other abuses. Existing suppliers will have to lay off employees and
in many cases cease operation. The disruption in terms of job loss
and involuntary supplier substitution will be large.”

The findings did not surprise Mark Higley, vice president,
development, for the Waterloo, Iowa-based VGM Group.

“If you review the individual product categories among all the
markets, the top four or five suppliers frequently exceed 50
percent of the total Medicare charges,” he noted. “After the first
half dozen or so, the tail of the curve runs very long with the
majority of the suppliers — winners and losers — with
only tenths of 1 percent of existing market share.

“It appears many of the larger players were unwilling to offer
an unreasonably low bid, and it only takes a few to vastly alter
the market structure,” Higley added.

“I concur with the study abstract stating that many of these
larger companies may have to lay off a substantial number of
employees and Medicare beneficiaries will be faced with, as Cramton
states, ‘involuntary supplier substitution,’” he said. “This most
recent analysis further augments the previous studies by Cramton
and others that the auction design is fatally flawed from both a
technical and a practical standpoint.”

Former HME provider Rob Brant said Cramton’s study holds some
valuable revelations. When the names of the contract winners were
first revealed, he said, “we immediately knew that out-of-the-area
companies won the bids. The difference is that with this study, we
now know that companies with the market share [were shut out] and
nearly all the bid winners have never done this before.”

Brant, like other providers, has already reaped the bitter
harvest of what CMS has sown. He shuttered City Medical Services in
North Miami Beach, Fla., at the end of April, even though he won a
contract to supply oxygen.

“Before competitive bidding, there were 400 oxygen providers in
Miami, and we were number eight [in market share] in the most
competitive market in the country,” Brant said, noting City
Medical’s standing in Cramton’s study. “I was a bid winner and I’m
forced to close my doors because I refused to go into personal
bankruptcy because of this program.”

Even though he was 10th in market share for CPAPs in the Miami
area, he said, he did not win a contract in that category.

“I was number 10 in the whole Southwest Florida area, and I’m
out of business now. What’s wrong with this picture?” Brant
asked.

‘All They Were Interested In Was the Lowest Price’

What’s wrong, according to Cramton and hundreds of other
experts, is CMS’ competitive bidding design. Since September, when
he spearheaded a letter to
Congress signed by 166 other economists and auction experts,
Cramton has campaigned to end the program, saying it does not
conform to accepted auction standards because bids are not binding;
the median-bid pricing rule is flawed; the design encourages
strategic bid skewing; and there is a lack of transparency.

On June 17, Cramton sent a letter
signed by 244 auction experts to President Obama urging that
the program be halted and corrected. Earlier in the month, he
proposed
legislative language calling for a bill that would mandate
scrapping Round 1 immediately and redesigning the program.

Cramton’s analysis hammered home what he believes is a
necessity.

“Although the evidence from the field is still preliminary due
to a lack of complete data, the preliminary analysis of the data
presented here suggests that the flaws identified in theory,
experiment, and practice, are very much present in the pilot.
Congress and CMS should move quickly to stop the implementation of
the Round 1 rebid and move to design and implement an efficient
auction for durable medical equipment,” Cramton said in his study
summary.

Brant said he believes Cramton’s new report makes it abundantly
apparent that CMS did not decide bid winners on any data other than
a low bid. “It clearly shows all they were interested in was the
lowest price,” he said.

“From reading and analyzing Dr. Cramton’s report, it kind of
blows me away that … when you look at the top companies, they
are already set up, they have the big vehicles, they already know
what the highest manufacturers’ discounts are — and CMS
ignored those companies,” said Brant. “It’s just amazing.”

In a newsletter to members of the Accredited Medical Equipment
Providers of America, of which he is president, Brant wrote, “This
not only shows how local communities have lost established,
experienced providers, it confirms [Cramton’s] argument that
inexperienced companies, with likely little idea of the cost of
providing services, gamed the system with ‘lowball bids.’

“The exclusion of companies with the largest market share goes
against any common sense,” Brant continued. “These established
companies already have the highest volume discounts from
manufacturers, have working facilities near local hospitals and
already have vehicles and trained staff to handle the largest
amount of business in the area. Yet Medicare gave contracts to
companies who simply bid lower, regardless of their facility,
vehicles, staff or if they have ever provided the equipment
before.”

He pointed out the study showed that in the Cleveland CBA, 87
percent of companies with the highest market share for CPAP devices
did not bid low enough to win contracts. The six largest companies,
which held 57 percent of the market share, were excluded.

That concerns him because patients can, and likely will, he
said, be harmed by the new providers’ lack of experience. He
questioned whether bid winners in the Dallas CBA — which held
only a combined 3 percent of market share in the diabetic supply
category before competitive bidding — carry brand-name
products, and whether the support surface bid winners in Miami
— which had a total 6 percent of previous market share
— were aware that patients with alternating pressure
mattresses need to be evaluated each month for multiple Stage 2 or
Stage 3 decubitis ulcers of the buttock.

He finds it doubtful, he said, that the contract suppliers for
walkers in the Kansas City area, which made up only 4 percent of
the market share pre-competitive bidding, can deliver and set up
$55 walkers to patients in the area’s 11 counties.

“I couldn’t deliver a walker for that around the corner,” he
said, noting that the cost of the walker is just one factor in
providing the product — there is documentation, delivery, the
delivery technician’s time, etc.

He pointed out that Lincare CFO Paul Gabos, speaking at a

mock auction Cramton held in April, noted that only 20 percent
of a provider’s cost is equipment — the other 80 percent is
service.

Will Cramton’s latest study help derail competitive
bidding?

“I think it is yet another example of how this program was bid
improperly,” Brant said. “The problem is, without the patients
saying ‘I can’t get my equipment’ or ‘I can’t get my supplies,’
Congress is just going to say, ‘Well, we knew some companies would
close. That’s a shame.’”

“The study bolsters the arguments forwarded to Congress and CMS
and the recent follow-up letter sent to President Obama,” said
Higley. “I would hope this spurs industry stakeholders to continue
to speak out and press Congress to pass H.R. 1041 [to halt
competitive bidding].

“On a related note,” he added, “this study again brings ups the
issue of transparency, such as the ‘capacity’ CMS presumes the
supplier will supply and the company’s financial standing.”

Higley said that a May 2010
lawsuit filed by the Texas Alliance for Home Care Services
against the Department of Health and Human Services “remains open,
and alleges that CMS has acted contrary to law by not providing
certain transparency relative to the program. Studies such as this
strengthen our argument.”

Scroll down to a PDF of Cramton’s analysis, titled “Medicare
Auction Failure: Early Evidence from the Round 1 Rebid,” at
www.cramton.umd.edu/papers/health-care/.

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