COLLEGE PARK, Md.—“So the notion is how to get more
efficient prices than the current fee schedules that we have in
place throughout the country. What’s going to be the
structure? What’s going to be the mechanism that produces the
best possible, most stable, efficient prices?”

That was the question asked by CMS Deputy Administrator Jonathan
Blum during keynote remarks at
economist Peter Cramton’s HME mock auction
April 1.

The answer, according to auction participants: Not the current CMS
competitive bidding model.

Even Tom Bradley, chief of Medicare cost estimates for the
Congressional Budget Office, declared the current CMS scheme
unworkable. Speaking on a panel titled “What Have We
Learned” following the auction, Bradley criticized CMS’
competitive bidding design, saying that its resulting prices were
unsustainable and “arbitrary.”

“It’s a number that bears no relationship to the
market-bearing price,” Bradley said, adding that CMS had to
manipulate prices in order to get these “crazy low
bids” out of the mix and they did so by simply increasing
capacity. “If they don’t change the mechanism that they
use, I think there is a high possibility of failure in the next
round,” Bradley said.

If CMS doesn’t make changes, he said, “They may have to
get whacked upside the head with an auction failure.”

Bradley’s comments were “quite amazing,” said
Cara Bachenheimer, senior vice president of government relations
for Invacare, after the auction. “A CBO official has stated
that the program is bad!”

Scrap the Program Now
Bachenheimer added that the “most important take-away”
from the Cramton conference “is that you need to scrap the
current bid program as the critical first step. What that gets
replaced with is the next question, but we need to get rid of the
current Round 1 bid program and process before we can move to the
second step.”

Speaking on the same panel as Bradley, Walt Gorski, vice president
of government affairs for the American Association for Homecare,
also stressed that the program must be halted.

“We have to stop this program now before we tear the fabric
of the home care sector into tatters,” he said.

The issue of how to stop it—whether by halting the current
program and redesigning it or repealing it all
together—rumbled through the hall at the University of
Maryland Inn and Conference Center. Some 110 stakeholders came
together to grapple with the issue of competitive bidding and take
part in the mock auction.

Cramton, a renowned economics professor at UM, has been fighting
the CMS project for months, saying its design is “fatally
flawed” and goes against all proper auction precepts. The
auction “actually went better than my wildest dreams,”
he said. “It was a superb group of people, and everybody was
extremely focused on the issues. We certainly had different points
of view and there was lots of disagreement.”

While he firmly believes that a “proper” auction can be
a useful tool in pricing HME for Medicare, Cramton said his primary
goal in holding the mock event was to demonstrate “how you
participate in a modern auction that is extremely transparent and
extremely efficient and achieves the goal of the right prices and
the right suppliers. I think that was conveyed and I think people
did get that.”

Better Alternative, but Still Not the Way to

There were lessons learned, said AAHomecare’s Gorski. But
bidding for HME is still not the way to go.

“I thought the auction process as designed by Cramton and his
colleagues addressed a number of issues that we have always
expressed concerns about, such as the ability to manipulate pricing
by the use of the median bid and suppliers being able to submit
low-ball bids in an effort to get a contract,” he noted.
“With that said, the association firmly believes that an
auction or bidding program isn’t workable for HME. There are
fundamental impediments that prevent an auction for health care
equipment and services. Auctioning health care services cannot be
compared to auctioning electrons.”

According to attendee Robert Lee, government affairs and health
policy analyst for Care Medical in Portland, Ore., “It gave
us a new perception as to what competitive bidding could look like
… I’m quite optimistic in seeing how experts in auction
engineering are actually proposing a valid concept. It may not be
what the industry wants, but it is certainly a far better
alternative to the CMS program.”

Lee said he liked the transparency of Cramton’s auction.
“If it was implemented in that fashion, certainly many
providers would be more comfortable knowing that if they submit a
bid, they are not losing money,” he said. “It is not a
complete attack on the provider community.”

David Doubek, president of Doubek Medical Supply in Alsip, Ill.,
said he is a fan of repealing competitive bidding. “But I am
a realist and I don’t think this is going away,” he
said, adding that one of the reasons he attended the mock auction
was to learn more about how it would work. “If something like
Dr. Cramton’s auction goes on, I want to know as much as I
can about it,” he said.

In Cramton’s model, he said, bids were binding and the design
encouraged “true” bids. It also pointed up a major
problem among providers.

For the mock auction, Cramton gave participants their complete
overhead costs, Doubek said, so the auction ran smoothly. In real
life, however, providers need to figure out their costs
themselves—and many don’t. “The biggest argument
is that there are a lot of people out there who don’t know
their costs,” he said, “so you are going to have some
people who bid low and skew the bid.”

Gorski, in his panel comments, said there are many variables,
including, for example, that HCPCS codes are not specific enough to
bid on an item and its related services. “Services are not
clearly defined for all items in the HME benefit,” he said.
“Bottom line here is that bidding will result in services to
the beneficiary, so without a clear understanding of what it costs
to provide services to a beneficiary, it is difficult to see how
bidding can work.”

Wayne Stanfield, president of the National Association of
Independent Medical Equipment Suppliers, said he believes CMS would
have to “redefine the products and what is included in those
products” before an auction would work. For example, he said,
a redefinition for a hospital bed might include intake, getting a
certificate of medical necessity, delivering the bed, educating the
patient and providing routine service, in addition to

“Now I know what my cost is,” Stanfield said, adding
that he was impressed with the overall efficiency of the mock
auction. “At the end of the bidding, everyone knew whether
they were in or not. When I put my last bid in and the last bid
closed out, I was able to look at my profit page and I knew what
the prices were on the products I had won and those I had not. It
was instantaneous.

“I’m not for a moment saying that I am in favor of an
auction for DME,” Stanfield said. “I am saying that if
this is the direction we have to go, Cramton’s auction is
better than anything else.”

Under this type of auction, Stanfield said, if he were to lose, it
would be his own fault. Doubek saw that in action. “People
didn’t maximize their profit margins,” he said.
“They got out of the market too early. They should have
stayed in and made money and they didn’t.”

No matter what, there will be winners and losers, Cramton said,
though the number of losers in his auction version wouldn't begin
to rival that of the CMS bidding system, under which
80 percent of established providers lost Round 1 contracts
some categories. With his design, Cramton said, “the winners
are going to be the efficient providers. What you are going to see
… is that for 80 percent of the country it is ‘any
willing provider.’ Then you’ll see a gradual shift in
the market—those that can’t compete will fall by the
wayside while efficient providers grow and expand.”

Blum had to leave early and did not participate in the mock auction
or hear the panelists. However, other representatives from CMS

“CMS staff will be here throughout to participate, to learn,
to understand,” Blum told auction attendees.
“That’s going into our thinking. We want to hear from

Videos of the mock auction and conference are available for:

Professor Peter Cramton's
opening remarks

Auction methodology and demonstration

The final auction
panel, "What Have We Learned?"