COLLEGE PARK, Md. — In what one stakeholder termed "the strongest case yet" against competitive bidding, economist Peter Cramton wrote a letter to President Barack Obama underscoring the fatal flaws in CMS' bidding design and asking for presidential involvement in getting the program redrawn. The letter, sent Friday, was signed by 244 auction design experts.

"Given the disregard by [the Centers for Medicare and Medicaid Services] of the market design recommendations received from recognized experts, we call upon the executive branch to direct CMS to proceed otherwise," read the letter, which was copied to Health and Human Services Secretary Kathleen Sebelius, the White House Office of Information and Regulatory Affairs and the President's Council of Economic Advisors.

"We also ask that you consider supporting new legislation that requires the Secretary of Health and Human Services to conduct efficient Medicare auctions, consistent with the best practice and the best science," the letter added.

The letter is the latest volley in Cramton's battle to get CMS to address the major defects in its competitive bidding design. Those efforts began in September, when Cramton, an economics professor at the University of Maryland, sent a letter signed by 166 other renowned auction experts to Congress detailing the program's deficiencies and calling for its implementation to be halted.

CMS brushed aside concerns expressed by members of Congress, implementing the program — as designed — in January in nine competitive bidding areas across the country. Cramton and the scores of other economists continued their crusade, holding meetings with powerbrokers, congressional briefings and a mock auction attended by home medical equipment providers, economists and even some CMS officials.

Earlier this month, Cramton drafted legislative language calling for the current program to be halted and redesigned according to accepted auction practices, not by CMS but by an independent market monitor. According to his plan, the new auction would be implemented in 2013.

His hope is that the language can be turned into a bill and ultimately passed by Congress.

Cramton said the letter to the president is yet another attempt to get some action.

"Today's letter from many distinguished economists, computer scientists, and engineers, including four Nobel Prize winners in economics, is sent as a result of CMS' failure to reform the flawed auctions," Cramton told HomeCare Friday.

"I directed the letter to President Obama because I believe that support of the administration is important to speed reform of the Medicare auctions," he added, noting he believes the design work must be led by HHS, not CMS. "Of course, the letter also went to leaders in both the Senate and the House. I remain convinced that we need a legislative solution. CMS needs strong guidance from Congress.

"My hope," Cramton continued, "is that when 244 distinguished experts, including four Nobel Laureates, present such a strong letter in favor of reform, both the administration and the Congress will take notice and do what is right, especially since everyone benefits from reform (except those engaged in fraud and corruption)."

In spite of the fact that the industry has been largely against any type of competitive bidding for HME, advocates applauded the newest letter.

"This is the strongest case yet made for CMS and Congress to take action to end the current program," Wayne Stanfield, president and CEO of the National Association of Independent Medical Equipment Suppliers, told members in a NAIMES news bulletin.

"It's important to keep the pressure up," said Cara Bachenheimer, senior vice president of government relations for Elyria, Ohio-based Invacare. "The new message is that he is frustrated that he has been stonewalled by CMS and is appealing to a higher order to step in and get this fixed. It's absolutely a good thing. He is a very credible spokesperson."

Whether or not providers support Cramton's idea of reforming the design and re-implementing competitive bidding, Bachenheimer said, "he does a great job of pointing out how flawed the program is and how immune CMS is to [efforts to change it]. This is the most useful thing — we need to use it to amplify the noise level."

That's imperative because so much is clamoring for attention on Capital Hill — the economy, the budget deficit, health reform — that it's hard for the competitive bidding issue to gain attention, she said. Does she think in the end the president will respond to amped up noise level and step in?

"He is the president, he is the head of the executive branch. He would certainly have the power to make significant changes for Round 2," Bachenheimer said. "That could be done through regulation. He could tell CMS they need to fix this program according to these economists' recommendations. Theoretically, yes, the president's office could do something, but I am not holding my breath on that."

Still, she said, it is crucial for the industry to add its voice to those of the economists in underscoring the disastrous effects of the fatally flawed project.

"The noise level is so critical," said Bachenheimer. "Don't under estimate CMS' PR capabilities. They keep littering the Hill with the message that everything is great. When Congress doesn't hear anything else, that's what they believe.

"Grassroots has proven successful for us in the past, and it could be successful for us in the future," she added.

The full text of Cramton's letter to the president follows:

Dear President Obama,

We are economists, computer scientists and engineers with expertise in the theory and practice of auctions. In September 2010, many of us signed a letter to Congressional leaders pointing out the numerous fatal flaws in the current Medicare competitive bidding program for durable medical equipment (DME). We also emphasized that the flaws could easily be fixed by adopting modern auction methods that have been developed over the last fifteen years and are now well understood.

The flaws in the auctions administered by the Centers for Medicare and Medicaid Services (CMS) are numerous. The use of non-binding bids together with setting the price equal to the median of the winning bids provides a strong incentive for low-ball bids-submitting bids dramatically below actual cost. This leads to complete market failure in theory and partial market failure in the lab. Another problem is the lack of transparency. For example, bidder quantities are chosen arbitrarily by CMS, enabling a wide range of prices to emerge that have no relation to competitive market prices.

We write today, nine months later, to report that — much to our dismay — there are to date no signs that CMS has responded to the professional opinions of auction experts or taken any serious steps to fix the obvious flaws to the competitive bidding program. Rather CMS continues to recite the mantra that all is well and that CMS does not plan to make any changes to the program as it expands from nine pilots to the entire United States.

We find this especially distressing and unreasonable given your Executive Order of 18 January 2011 on regulation. In that order, you lay out numerous sensible principles of regulation that administrative agencies must follow. The CMS competitive bidding program violates all of the principles, especially the principles of transparency and of basing regulations on the best available science. Indeed, the current program is the antithesis of science and contradicts all that is known about proper market design.

Since the writing of our letter in September, several of us have done further detailed scientific study to explore the properties of the CMS design and contrast it to modern efficient auctions. The findings are dramatic and illustrate the power of science to inform auction design. Specifically, auction theory was used to demonstrate the poor incentive properties of the CMS design and how these lead to poor outcomes. Laboratory experiments were conducted at Caltech and the University of Maryland that demonstrate that these poor theoretical properties are observed in the lab. Moreover, simple efficient auctions perform extremely well in both theory and in the economic laboratory. Finally, some of us have studied extensively the Medicare setting, speaking with hundreds of DME providers and beneficiaries, and have developed a modern auction design for the setting that is consistent with the best practice and market design methodologies.

This design step was far from a theoretical exercise. On 1 April 2011, a Medicare auction conference was conducted at the University of Maryland to show how the modern auction methods work and to conduct a nearly full-scale demonstration of an efficient auction. Over 100 leaders in government and the DME industry attended the event. The results are documented at, including a complete video and transcript of the event. The mock auction achieved an auction efficiency of 97%. In sharp contrast, the CMS auction exhibited efficiencies well below 50 in the laboratory, even in simplified environments. Despite these sharp results, CMS continues to assert that all is well and that no significant changes are required.

The problems with the CMS auction grow worse upon closer inspection. The complete lack of transparency is inappropriate for a government auction. For example, we now know that CMS has almost complete discretion with respect to setting prices in a nontransparent way. CMS can and did manipulate the quantities reported by bidders during qualification. These quantities are essential to forming the supply curve, which ultimately sets the price in each product-region. To this date we know little about what quantities were used in the price determination. As a result of this lack of transparency, it is now clear that the CMS design is not an auction at all but an arbitrary pricing process.

Given that nine months have passed and given the disregard by CMS of the market design recommendations received from recognized experts, we call upon the executive branch to direct CMS to proceed otherwise. We also ask that you consider supporting new legislation that requires the Secretary of Health and Human Services to conduct efficient Medicare auctions, consistent with the best practice and the best science.

There is much at stake. Unfunded Medicare expenses are estimated to be in the tens of trillions of dollars going forward. Medicare is unsustainable without the introduction of innovative market methods and other fundamental reforms. The DME auction program represents an important first step, especially since failures in homecare will inevitably lead to much more expensive care at the hospital.

We believe that proper design and implementation of market methods can bring gains to all interested parties: Medicare beneficiaries benefit from receiving the quality goods and services they need, Medicare providers benefit from being paid sustainable competitive prices for the quality goods and services they deliver, taxpayers benefit by paying the least-cost sustainable prices for these products, and CMS benefits from the numerous efficiencies that result from conducting an effective program, largely free of complaint, fraud, and corruption.

We believe that government plays an important role in establishing effective market rules. For the Medicare auctions, the impediments to reform are not special interests or a lack of knowledge, but bureaucratic inertia. This is an important setting and change of the prior administration's regulations is required to contain Medicare costs and assure quality services for Medicare beneficiaries. We are counting on your leadership to bring effective reform.

Many thanks for your thoughtful consideration of our concerns.


(Followed by 244 signatures)

Download a PDF of the letter and signatures.

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