Failures in Medicare's Competitive Bidding System for Home Medical Equipment Revealed by Caltech Study and Published in Quarterly Journal of Economics

Medicare Should Heed Warnings by Hundreds of Prominent Economists and Fix the Controversial Bidding System, Says American Association for Homecare

WASHINGTON, June 11, 2012 /PRNewswire-USNewswire/ -- A study published in the May issue of The Quarterly Journal of Economics finds that Medicare's competitive bidding system for home medical equipment "fails to generate competitive prices of goods and fails to satisfy demand."  The Quarterly Journal of Economics is published by Oxford University Press and is edited at Harvard University's Department of Economics.

The article was written by Charles R. Plott, Ph.D., professor of political science and economics at California Institute of Technology (Caltech), and two of his students, Brian Merlob and Yuanjun Zhang, who conducted a year-long study of the bidding system — or auction — that was designed by the Centers for Medicare and Medicaid Services (CMS). This auction system was designed to align Medicare reimbursement rates with market prices for home medical equipment and services such as respiratory devices, wheelchairs, and hospital beds.

Caltech summarizes Plott's findings this way:

"Many experts have criticized the auction, pointing out fundamental flaws in its design. Now, a series of experiments testing the auction structure show that it does, in fact, fall short of expectations. ... In principle, auctions are a cheap and efficient way to procure goods and reward companies that can inexpensively produce their goods. ...

Unlike standard auctions, however, the CMS auction was designed with two unorthodox rules. First, the eventual selling price is set at the median of all of the winning bids. Second, bids are nonbinding, so companies can change their mind once the prices are set.

Critics say that these rules cultivate a harmful bidding strategy. To ensure a winning bid, each company will make a very low offer; this carries no risk, because the companies can cancel their bid if the median price turns out to be too low. The result is that participants in the auction will tend to make low-ball bids, assuring that the median price will also be very low—so low, in fact, that few of the companies can actually afford it, leading them to cancel their offers. At the extreme, nothing is bought or sold and, Plott says, 'the auction crashes. It's just not an effective auction.'

And what will happen then, critics warn, is that the government will end up negotiating prices with individual companies—negating the whole point of a competitive-bidding scheme in the first place. 'You can see immediately from theoretical arguments that the potential for disaster is built right in the strategic structures,' Plott says."

The abstract of The Quarterly Journal of Economics article states:

"We report on the experimental results of simple auctions with (i) a median-bid pricing rule and (ii) nonbinding bids (winning bids can be withdrawn)—the two central pillars of the competitive bidding program designed by the Centers for Medicare and Medicaid Services (CMS). Comparisons between the performance of the CMS auction and the performance of the excluded-bid auction reveal the problematic nature of the CMS auction. The CMS auction fails to generate competitive prices of goods and fails to satisfy demand. In all proposed efficiency measures, we find the excluded-bid auction significantly outperforms the CMS auction."

Citing the likelihood that Medicare beneficiaries are not receiving necessary medical equipment and services, the American Association for Homecare is urging Congress to adopt the Market Pricing Program (MPP) to replace the controversial bidding program for home medical equipment and services.

In January 2011, Medicare implemented the bidding program in Charlotte, Cincinnati, Cleveland, Dallas-Ft. Worth, Kansas City, Miami, Orlando, Pittsburgh and Riverside, California.  CMS is now expanding the bidding program to 91 additional metropolitan areas throughout the U.S. 

Lined up in opposition to the current Medicare bidding program are 244 economists, 30 consumer and disability groups such as United Spinal and the ALS Association, and 171 members of Congress. 

The American Association for Homecare notes that the Caltech study is another significant red flag and warning from hundreds of economists about the poor design of Medicare's auction system, and it underscores the need to replace the current system with a vastly improved alternative recommended by auction experts — the Market Pricing Program.

The Market Pricing Program is based on recommendations by economists and auction experts who have studied the current program. It features an auction system to establish market-based prices around the country and would require Medicare to make fundamental changes to ensure the long-term viability of the pricing program.

In addition to achieving an accurate market price, the Market Pricing Program includes these features:

• Bids are binding for the bidders and cash deposits are required to ensure that only serious homecare providers participate.
• The bid price is based on the clearing price, not the median price of winners.
• The program includes the same equipment and services as the current bidding system and would be implemented across the country during the same timeframe. 
• Two product categories per market area would be bid. Eight additional product categories in that same area would have prices reduced based on auctions conducted simultaneously in comparable geographic areas. 

"This market-based system would ensure that Medicare beneficiaries receive the services and equipment that they need and ensure that the government pays fair, competitive prices for the equipment and services provided," states Tyler J. Wilson, president of the American Association for Homecare. "That makes it a win-win for taxpayers and beneficiaries."  

Since the bidding program was implemented in 2011, the American Association for Homecare has received reports from hundreds of Medicare patients about difficulty finding local equipment and service providers, delays in obtaining medically required equipment and services, and fewer choices when selecting equipment and providers.

Medical oxygen, walkers, respiratory devices, hospital beds, wheelchairs, and other medical equipment and supplies prescribed for Medicare beneficiaries reduce spending by preventing treatment in higher-cost settings. Data from CMS shows that when Medicare patients don't use prescribed home medical equipment and services, their use of emergency room and hospital services increases.  So while the current bidding program may further reduce spending on home medical equipment, which represents just 1.4 percent of Medicare spending, taxpayers will see spending increase dramatically in hospitals and ERs as patients' options for home-based care continue to shut down.

The American Association for Homecare represents durable medical equipment providers, manufacturers, and others in the homecare community that serve the medical needs of millions of Americans who require oxygen systems, wheelchairs, medical supplies, inhalation drug therapy, and other medical equipment and services in their homes. Members operate more than 3,000 homecare locations in all 50 states.  Visit www.aahomecare.org/athome.  

SOURCE American Association for Homecare