With the go-live date for the "competitive" bidding program in
nine areas across the country fast approaching, attention to this
controversial program is growing in Congress. At press time, CMS
had not yet announced the names of the contractors; that
information will be important in determining whether Congress
intervenes before January 1.
One critical development is a recent letter signed by over 160
economists from prestigious universities. Separate from the
industry, these economists wrote to Congress about the fatal flaws
in the bidding program that CMS has constructed. While the
economists did state that competitive bidding can be an effective
tool to control costs without sacrificing quality, they said the
current program, as CMS has designed it, will result in "a failed
government program."
Key comments from their letter follow:
"The first problem is that the auction rules violate a
basic principle of auction design: bids must be 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 second problem is a flawed pricing rule.
As is standard in multi-unit procurement auctions, bids are sorted
from lowest to highest, and winners are selected, lowest bid first,
until the cumulative supply quantity equals the estimated demand.
What is odd is that rather than paying winners the clearing price
(the last-accepted bid), the auction pays winners the unweighted
median among the winning bids.
"This is unique in our collective experience. The result is that
fifty percent of the winning bidders are offered a contract price
less than their bids. This median pricing rule further encourages
low-ball bids, since a low bid guarantees winning, does not affect
the price and gives the supplier a free option to sign a supply
contract. 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. Others may
accept the contract and cross-subsidize public patients with the
revenue from private patients, or just take a loss. This pricing
rule does not develop a sustainable competitive bidding process or
healthy supplier pool."
"The third problem arises from the use of composite
bids, an average of a bidder's bids across many products
weighted by government estimated demand. This provides strong
incentives to distort bids away from costs — the problem of
bid skewing. Bidders bid low on products where the government
overestimated demand and high on products where the government
underestimated demand. As a result, prices for individual products
are not closely related to costs. 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."
"The fourth problem is a lack of transparency.
It is unclear how quantities associated with each bidder are
determined … Bids from the last auction event were taken in
November 2009, and now more than ten months later, we still do not
know who won contracts. 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 …
"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
deteriorates, and supply shortages become common. Contract
enforcement would become increasingly difficult and fraud and abuse
would grow."
Whether Congress will step in and require CMS to change the
course of the competitive bid program remains to be seen. What is
clear is that 257 cosponsors of the House bill that would repeal
the program (H.R. 3790) and continued congressional oversight
signal that a good percentage of members of Congress are keenly
interested in how the bid program will impact their
communities.
Read more Washington Wit & Wisdom
columns. View more competitive bidding
stories.
A specialist in health care legislation, regulations and
government relations, Cara C. Bachenheimer is vice president,
government relations, for Invacare Corp., Elyria, Ohio.
Bachenheimer previously worked at the law firm of Epstein, Becker
& Green in Washington, D.C., and at the American Association
for Homecare and the Health Industry Distributors Association. You
can reach her at 440/329-6226 or cbachenheimer@invacare.com.
