Cramton Design Beats Current Bidding System
From: Home Care Magazine
But it still won’t work for HME, industry advocates sayCOLLEGE PARK, Md.—“So the notion is how to get more efficient prices than the current fee schedules that we have in place throughout the country. What’s going to be the structure? What’s going to be the mechanism that produces the best possible, most stable, efficient prices?”
That was the question asked by CMS Deputy Administrator Jonathan Blum during keynote remarks at economist Peter Cramton’s HME mock auction April 1.
The answer, according to auction participants: Not the current CMS competitive bidding model.
Even Tom Bradley, chief of Medicare cost estimates for the Congressional Budget Office, declared the current CMS scheme unworkable. Speaking on a panel titled “What Have We Learned” following the auction, Bradley criticized CMS’ competitive bidding design, saying that its resulting prices were unsustainable and “arbitrary.”
“It’s a number that bears no relationship to the market-bearing price,” Bradley said, adding that CMS had to manipulate prices in order to get these “crazy low bids” out of the mix and they did so by simply increasing capacity. “If they don’t change the mechanism that they use, I think there is a high possibility of failure in the next round,” Bradley said.
If CMS doesn’t make changes, he said, “They may have to get whacked upside the head with an auction failure.”
Bradley’s comments were “quite amazing,” said Cara Bachenheimer, senior vice president of government relations for Invacare, after the auction. “A CBO official has stated that the program is bad!”
Scrap the Program Now
Bachenheimer added that the “most important take-away” from the Cramton conference “is that you need to scrap the current bid program as the critical first step. What that gets replaced with is the next question, but we need to get rid of the current Round 1 bid program and process before we can move to the second step.”
Speaking on the same panel as Bradley, Walt Gorski, vice president of government affairs for the American Association for Homecare, also stressed that the program must be halted.
“We have to stop this program now before we tear the fabric of the home care sector into tatters,” he said.
The issue of how to stop it—whether by halting the current program and redesigning it or repealing it all together—rumbled through the hall at the University of Maryland Inn and Conference Center. Some 110 stakeholders came together to grapple with the issue of competitive bidding and take part in the mock auction.
Cramton, a renowned economics professor at UM, has been fighting the CMS project for months, saying its design is “fatally flawed” and goes against all proper auction precepts. The auction “actually went better than my wildest dreams,” he said. “It was a superb group of people, and everybody was extremely focused on the issues. We certainly had different points of view and there was lots of disagreement.”
While he firmly believes that a “proper” auction can be a useful tool in pricing HME for Medicare, Cramton said his primary goal in holding the mock event was to demonstrate “how you participate in a modern auction that is extremely transparent and extremely efficient and achieves the goal of the right prices and the right suppliers. I think that was conveyed and I think people did get that.”
Better Alternative, but Still Not the Way to Go
There were lessons learned, said AAHomecare’s Gorski. But bidding for HME is still not the way to go.
“I thought the auction process as designed by Cramton and his colleagues addressed a number of issues that we have always expressed concerns about, such as the ability to manipulate pricing by the use of the median bid and suppliers being able to submit low-ball bids in an effort to get a contract,” he noted. “With that said, the association firmly believes that an auction or bidding program isn’t workable for HME. There are fundamental impediments that prevent an auction for health care equipment and services. Auctioning health care services cannot be compared to auctioning electrons.”
According to attendee Robert Lee, government affairs and health policy analyst for Care Medical in Portland, Ore., “It gave us a new perception as to what competitive bidding could look like … I’m quite optimistic in seeing how experts in auction engineering are actually proposing a valid concept. It may not be what the industry wants, but it is certainly a far better alternative to the CMS program.”
Lee said he liked the transparency of Cramton’s auction. “If it was implemented in that fashion, certainly many providers would be more comfortable knowing that if they submit a bid, they are not losing money,” he said. “It is not a complete attack on the provider community.”
David Doubek, president of Doubek Medical Supply in Alsip, Ill., said he is a fan of repealing competitive bidding. “But I am a realist and I don’t think this is going away,” he said, adding that one of the reasons he attended the mock auction was to learn more about how it would work. “If something like Dr. Cramton’s auction goes on, I want to know as much as I can about it,” he said.
In Cramton’s model, he said, bids were binding and the design encouraged “true” bids. It also pointed up a major problem among providers.
For the mock auction, Cramton gave participants their complete overhead costs, Doubek said, so the auction ran smoothly. In real life, however, providers need to figure out their costs themselves—and many don’t. “The biggest argument is that there are a lot of people out there who don’t know their costs,” he said, “so you are going to have some people who bid low and skew the bid.”
Gorski, in his panel comments, said there are many variables, including, for example, that HCPCS codes are not specific enough to bid on an item and its related services. “Services are not clearly defined for all items in the HME benefit,” he said. “Bottom line here is that bidding will result in services to the beneficiary, so without a clear understanding of what it costs to provide services to a beneficiary, it is difficult to see how bidding can work.”
Wayne Stanfield, president of the National Association of Independent Medical Equipment Suppliers, said he believes CMS would have to “redefine the products and what is included in those products” before an auction would work. For example, he said, a redefinition for a hospital bed might include intake, getting a certificate of medical necessity, delivering the bed, educating the patient and providing routine service, in addition to overhead.
“Now I know what my cost is,” Stanfield said, adding that he was impressed with the overall efficiency of the mock auction. “At the end of the bidding, everyone knew whether they were in or not. When I put my last bid in and the last bid closed out, I was able to look at my profit page and I knew what the prices were on the products I had won and those I had not. It was instantaneous.
“I’m not for a moment saying that I am in favor of an auction for DME,” Stanfield said. “I am saying that if this is the direction we have to go, Cramton’s auction is better than anything else.”
Under this type of auction, Stanfield said, if he were to lose, it would be his own fault. Doubek saw that in action. “People didn’t maximize their profit margins,” he said. “They got out of the market too early. They should have stayed in and made money and they didn’t.”
No matter what, there will be winners and losers, Cramton said, though the number of losers in his auction version wouldn’t begin to rival that of the CMS bidding system, under which 80 percent of established providers lost Round 1 contracts in some categories. With his design, Cramton said, “the winners are going to be the efficient providers. What you are going to see … is that for 80 percent of the country it is ‘any willing provider.’ Then you’ll see a gradual shift in the market—those that can’t compete will fall by the wayside while efficient providers grow and expand.”
Blum had to leave early and did not participate in the mock auction or hear the panelists. However, other representatives from CMS did.
“CMS staff will be here throughout to participate, to learn, to understand,” Blum told auction attendees. “That’s going into our thinking. We want to hear from stakeholders.”
Videos of the mock auction and conference are available for:
Auction methodology and demonstration
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