ATLANTA — CMS and Congress, are you listening? The voices
against DMEPOS competitive
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

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
    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

    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

    "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

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