New study highlights bid program's flaws

SAN FRANCISCO - Add the Pacific Research Institute to the long list of economists and researchers who believe CMS's current competitive bidding program for HME is inefficient at best and dangerous at worst.

PRI's study, “Reforming CMS' Competitive Bidding Process to Improve Quality and Sustainability,” borrows on the work of Peter Cramton, an economist and outspoken critic of the program, and research firms like Dobson DaVanzo & Associates.

“Medicare patients are receiving lower quality durable medical equipment, which is taking a toll on their health outcomes,” writes Wayne Winegarden. “Further, there is mounting evidence that the reimbursement policies are destabilizing the supplier market, portending sustainability problems in the future.”

Winegarden says there are two “devastating flaws” with the current program: First, CMS uses the median of the winning bids as the price; and second, the agency doesn't require a winning provider to fulfill its commitment.

The result is what he calls “unproductive gamesmanship,” including, among other things, providers intentionally underbidding to reduce the profitability of their competitors, and provides biasing winning bids toward lower cost/lower quality equipment.

Winegarden says CMS should set reimbursement price equal to the bid that is just high enough to ensure enough suppliers will produce the right quantity and quality of HME—a marketing-clearing price.

Other reforms that should be made, according to Winegarden:

• Bidding areas should be appropriately drawn so that the costs that suppliers bear are similar across the entire area
• All bidders should meet minimum quality and financial standards
• The bidding process should be transparent so that even if providers are not selected, stakeholders can see the bid arrays and understand how the rates were actually determined
• All bidders should be required to submit binding bids and/or provide bid surety bonds to ensure that they are committed to fulfilling their bids at the winning price

“These types of bidding systems have historically performed well when judged against the efficiency criteria for a competitive bidding process—it creates both allocation efficiency and quality efficiency,” he writes.

PRI Is a nonprofit, nonpartisan organization supported by private contributions that seeks to advance free-market policy solutions.