A new study by researchers at the California Institute of Technology, attached below, blasts CMS’ “competitive” bidding auction for Durable Medical Equipment.  The study published in the Quarterly Journal of Economics, found that CMS’ decision to use non-binding bids and median bid pricing does NOT result in competitive prices.  Of particular concern to Medicare beneficiaries and their families, the paper also found that the auction “fails to satsify demand.”  Researchers has already shown based on CMS data that utilitzation of life-sustaining home medical equipment dropped sharply under the new acquisition program.  Specifically, the paper concluded that: “The CMS auction fails to generate competitive prices of goods and fails to satisfy demand.”

The paper, The CMS Auction: Experimental Studies of a Median-Bid Procurement Auction with Nonbinding Bids, found that the problems with the federal auction were deep and not easily corrected.  The paper explains,

The first set of results focuses on the excluded-bid auction and establishes the fact that it performs well with reasons that are understandable. The second set of results demonstrates that the CMS auction is not a good auction. The results reveal the existence and severity of its architectural flaws. The third set of results demonstrates that the CMS auction cannot be easily fixed. These results are acquired by experiments involving auctions with variations on the central pillars of the CMS auction. The conclusions drawn from these results suggest that simply removing a faulty procedure does not correct the problems with the proposed auction and may create new problems.  [Emphasis added]

It is important to note that use of non-binding bids and median bid pricing was CMS’s decision.  As CRE’s legal analysis contained in our paper Auctioning Healthcare: The Need for a Clinical Trial of CMS’ Competitive Bidding Program for Durable Medical Equipment, (p. 4, footnote 9) makes clear, there is no basis for CMS’ assertions that they were required to allow non-binding bids.

CMS is bringing Medicare and Medicare beneficiaries to a crisis by refusing to acknowledge and fix the severe problems with the agency’s acquisition system for durable medical equipment.

The new study was financed by the Gordon and Betty Moore Foundation with additional support from a National Science Foundation grant.

The_CMS_Auction.QuarterlyJournalofEconomics.May2012

AuctioningHealthcare.2012.CRE