Economist on competitive bidding: 'Current approach is not going to work and will not continue'

Economist on competitive bidding: 'Current approach is not going to work and will not continue'
By Liz Beaulieu Editor - 12.17.2010

WASHINGTON - Economist Peter Cramton, a vocal critic of the current competitive bidding program for HME, gave a presentation on his new design to AAHomecare and state association leaders during a teleconference last week.

Cramton, a University of Maryland professor, also took questions during the call, which AAHomecare organized.

"From AAHomecare's perspective, we have under way a couple of efforts to develop alternatives to the current bidding program, so that's a reason to have a better and full understanding of (Cramton's) proposal," said Tyler Wilson, the association's president and CEO, at the start of the call. "Whether we borrow from his proposal, build on his proposal or go in a completely different direction, remains to be seen. At this point, the association hasn't endorsed, in any way, his design."

In all, 150 stakeholders participated in the call.

Cramton's design departs from CMS's in two big ways. The first: Prices would be set where supply and demand meet, a process he calls "a clearing price auction." The second: The design would require financial guarantees (in the form of bid bonds or deposits proportional to a bidder's size) and performance guarantees.

Here are some of the questions that industry stakeholders asked Cramton about the current program and his new design:

How will your design prevent a bidder from continuing to submit unrealistically low bids?

"First, to place a bid, they have the bid bond, and if they just walk away, there is real consequence," Cramton said. "They forfeit their bid bond. Then if the price turns out to be unsustainable--it's below everyone's costs and they're a winner--well, they have performance obligations. If they walk away, then the performance bond is lost. That's why the bidders are on notice that, 'Ah, the bids really mean something,' unlike in the CMS auction where they mean nothing."

Is your design appropriate for such a service-intensive industry as HME?

"Auctions are used where there are strong service components. For example, consider construction," Cramton said. "Most construction contracts and pretty much 100% of government construction contracts are awarded through competitive bid and auction, and believe me construction is one area where service and quality are important aspects. So auctions and service are not incompatible, nor is quality. What has to be done in those environments is, first, a good statement of what quality service is and what quality products are, and then ways of measuring that the quality products and services have been delivered and that is something that will require some future work. But yes, absolutely auctions work in environments where services and quality play a role."

Do you think the current competitive bidding program could be tweaked to work?

"No. It definitely can't work as it's currently designed," Cramton said. "It's fundamental reform that has to take place. CMS could get busy on it right away and develop and adopt reform. What I would recommend is a 12-month time-out. In those 12 months, we get busy coming up with an approach that works and works well. From my end, in terms of the auction, there's absolutely no problem in, say, conducting sensible auctions in the third quarter of 2011 for a Jan. 1, 2012 start. I think the biggest problem is going through all the regulatory aspects."

How quickly do you think we'll see problems from the current program?

"That's one where I suspect HME providers on the phone have more information than I do," Cramton said. "All I can say is, the Round 1 re-bid was extremely problematic, that the outcome was seriously flawed and that problems will appear. Whether they appear in the first week of January or not until July of 2011, I don't actually know, but I do know that the current approach is not going to work and will not continue. I just can't imagine, no matter what, if CMS is simply going to try to keep doing this again and again, it will definitely end."

For more specifics on Cramton's design, go to http://www.cramton.umd.edu/auction-papers-with-abstracts.htm#Medicare.