ATLANTA — CMS and Congress, are you listening? The voices against DMEPOS competitive bidding 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 quality."
The experts cited four main flaws:
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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.
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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.
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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."
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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 study 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 estimates.
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 forward.
"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.
View more competitive bidding stories.
