The New York Times Freakonomics blog post today titled, “Fix Medicare’s Bizarre Auction Program,” explains that “for the last ten years, the Centers for Medicare and Medicaid Services has been testing an auction approach that is incredible in the inefficiency of its flawed design.”
The article explains that “Medicare should junk the flawed procurement auction rules and take advantage of the enormous advances that have been made in auctions and market design to fix the auction rules.”
In conclusion, “The mystery is why the government has failed over a period of more than ten years to engage auction experts in the design and testing of the Medicare auctions. The letter confirms that any expert would be able to quickly identify fatal flaws in the Medicare competitive bidding program. We suspect the problem is that CMS initially did not realize that auction expertise was required, and once they spent millions of dollars developing the failed approach, they stuck with it rather than admit that mistakes were made. This bureaucratic inertia is seen not just in government but in all organizational decision making.”
To read the full post, click here.
Thursday, September 30, 2010
San Bernardino Sun Prints Rebuttal to Medicare Bidding Story
Esta Willman, owner of Medi-Source Equipment and Supply, Yucca Valley responded to a Medicare “competitive” bidding story which was published in the San Bernardino Sun. Willman states, “As someone who works with Medicare beneficiaries every day, it was disappointing to read the Sun’s recent editorial “Saving Money on Equipment,” which discusses Medicare’s “competitive” bidding program for home medical equipment. In addition to the factual errors, the editorial fails to examine the consequences that the program will have on patients and the Inland Empire.”
In her response, Willman points out that, “Furthermore, Medicare’s “competitive” bidding program for home medical equipment is a misnomer. This program is actually designed to eliminate about 90 percent of the equipment providers in a given market area, which reduces competition based on quality and service. As a result, it will be harder to ensure access to homecare – which is the most cost-effective setting for post acute care. Good home-based care for seniors and people with disabilities is not only cost-effective, but it also prevents much higher spending in more expensive settings – reducing the number of emergency room and hospital visits, speeding the hospital discharge process, and helping keep seniors safe and independent at home, rather than in far more expensive nursing facilities.”
To read the full article, visit http://www.sbsun.com/editorial/ci_16210024.
In her response, Willman points out that, “Furthermore, Medicare’s “competitive” bidding program for home medical equipment is a misnomer. This program is actually designed to eliminate about 90 percent of the equipment providers in a given market area, which reduces competition based on quality and service. As a result, it will be harder to ensure access to homecare – which is the most cost-effective setting for post acute care. Good home-based care for seniors and people with disabilities is not only cost-effective, but it also prevents much higher spending in more expensive settings – reducing the number of emergency room and hospital visits, speeding the hospital discharge process, and helping keep seniors safe and independent at home, rather than in far more expensive nursing facilities.”
To read the full article, visit http://www.sbsun.com/editorial/ci_16210024.
Experts on Bidding Say CMS System Will Fail
One hundred and sixty-six of the world’s authorities on auctions and competitive bidding systems sent a letter to Congress earlier this week outlining severe problems with the Medicare bidding program for durable medical equipment.
The experts don’t oppose the idea of using a bidding system to set prices but they point out that the CMS bidding program has four severe flaws:
• The bids are not binding.
• Median-bid pricing encourages low-ball bids.
• The use of composite bids distorts prices.
• Lack of transparency undermines the system.
The experts conclude, “This collection of problems suggests that the program over time may degenerate into a ‘race to the bottom’ in which suppliers become increasingly unreliable, product and service quality deteriorates, and supply shortages become common. Contract enforcement would become increasingly difficult and fraud and abuse would grow… We recommend that the government fix the flaws in the current auction program and develop a new design that emphasizes the key features of successful designs. Implementation of the current design will result in a failed government program.”
Please share the letter with your Representative and Senators and with your local and state chapters of AARP and other organizations that advocate for seniors or patient groups.
Tyler Wilson, AAHomecare president, said, “It’s one thing for us to predict that the bidding program will not fly. But when 166 respected experts – who can envision a well-designed competitive bidding program – independently warn the program will go down in flames, that should send up real warning signals there’s trouble ahead.”
Most of the experts who signed the letter are professors or staff at leading universities throughout the world including Yale, Harvard, Stanford, MIT, London School of Economics, University of Chicago, University of Pennsylvania, Duke, Columbia, California Institute of Technology, and Cornell, among others. (The letter states the signatories’ views are their own and do not represent the views of any organization.)
The economists’ letter was addressed to Rep. Pete Stark who chairs the House Ways and Means Subcommittee on Health. The subcommittee appears to be skeptical of CMS claims about the virtues of the bidding program. Stark forwarded the letter to CMS Administrator Donald Berwick yesterday with a cover letter that reiterates the experts’ concerns: “[I]f not addressed these flaws will ultimately reduce beneficiary access to necessary equipment, lead to lower quality items and services, and could increase fraud and abuse.”
Economists Peter Cramton of the University of Maryland and Brett E. Katzman of
Kennesaw State University led the effort to gather the signatures and draft the letter.
An excerpt follows:
Four main problems
The first problem is that the auction rules violate a basic principle of auction design: bids must be binding commitments. In the Medicare auction, bidders are not bound by their bids. Any auction winner can decline to sign a supply contract following the auction. This undermines the credibility of bids, and encourages low-ball bids in which the supplier acquires at no cost the option to sign a supply contract.
The second problem is a flawed pricing rule. As is standard in multi-unit procurement auctions, bids are sorted from lowest to highest, and winners are selected, lowest bid first, until the cumulative supply quantity equals the estimated demand. What is odd is that rather than paying winners the clearing price (the last-accepted bid), the auction pays winners the unweighted median among the winning bids. This is unique in our collective experience. The result is that fifty percent of the winning bidders are offered a contract price less than their bids. This median pricing rule further encourages low-ball bids, since a low bid guarantees winning, does not impact the price, and gives the supplier a free option to sign a supply contract. Even if suppliers bid their true costs, up to one-half of the winning suppliers would reject the supply contract and the government would be left with insufficient supply. Others may accept the contract and cross-subsidize public patients with the revenue from private patients, or just take a loss. This pricing rule does not develop a sustainable competitive bidding process or healthy supplier pool.
The third problem arises from the use of composite bids, an average of a bidder’s bids across many products weighted by government estimated demand. This provides strong incentives to distort bids away from costs—the problem of bid skewing. Bidders bid low on products where the government overestimated demand and high on products where the government underestimated demand. As a result, prices for individual products are not closely related to costs. Bid skewing is especially problematic in this setting, since the divergence between costs and prices likely will result in selective fulfillment of customer orders. Orders for low-priced products are apt to go unfilled.
The fourth problem is a lack of transparency. It is unclear how quantities associated with each bidder are determined. These quantities are set in a non-transparent way in advance of the auction. Bids from the last auction event were taken in November 2009, and now more than ten months later, we still do not know who won contracts. Both quality standards and performance obligations are unclear. This lack of transparency is unacceptable in a government auction and is in sharp contrast to well-run government auctions such as the Federal Communications Commission spectrum auctions.
Click here to view the full letter.
The experts don’t oppose the idea of using a bidding system to set prices but they point out that the CMS bidding program has four severe flaws:
• The bids are not binding.
• Median-bid pricing encourages low-ball bids.
• The use of composite bids distorts prices.
• Lack of transparency undermines the system.
The experts conclude, “This collection of problems suggests that the program over time may degenerate into a ‘race to the bottom’ in which suppliers become increasingly unreliable, product and service quality deteriorates, and supply shortages become common. Contract enforcement would become increasingly difficult and fraud and abuse would grow… We recommend that the government fix the flaws in the current auction program and develop a new design that emphasizes the key features of successful designs. Implementation of the current design will result in a failed government program.”
Please share the letter with your Representative and Senators and with your local and state chapters of AARP and other organizations that advocate for seniors or patient groups.
Tyler Wilson, AAHomecare president, said, “It’s one thing for us to predict that the bidding program will not fly. But when 166 respected experts – who can envision a well-designed competitive bidding program – independently warn the program will go down in flames, that should send up real warning signals there’s trouble ahead.”
Most of the experts who signed the letter are professors or staff at leading universities throughout the world including Yale, Harvard, Stanford, MIT, London School of Economics, University of Chicago, University of Pennsylvania, Duke, Columbia, California Institute of Technology, and Cornell, among others. (The letter states the signatories’ views are their own and do not represent the views of any organization.)
The economists’ letter was addressed to Rep. Pete Stark who chairs the House Ways and Means Subcommittee on Health. The subcommittee appears to be skeptical of CMS claims about the virtues of the bidding program. Stark forwarded the letter to CMS Administrator Donald Berwick yesterday with a cover letter that reiterates the experts’ concerns: “[I]f not addressed these flaws will ultimately reduce beneficiary access to necessary equipment, lead to lower quality items and services, and could increase fraud and abuse.”
Economists Peter Cramton of the University of Maryland and Brett E. Katzman of
Kennesaw State University led the effort to gather the signatures and draft the letter.
An excerpt follows:
Four main problems
The first problem is that the auction rules violate a basic principle of auction design: bids must be binding commitments. In the Medicare auction, bidders are not bound by their bids. Any auction winner can decline to sign a supply contract following the auction. This undermines the credibility of bids, and encourages low-ball bids in which the supplier acquires at no cost the option to sign a supply contract.
The second problem is a flawed pricing rule. As is standard in multi-unit procurement auctions, bids are sorted from lowest to highest, and winners are selected, lowest bid first, until the cumulative supply quantity equals the estimated demand. What is odd is that rather than paying winners the clearing price (the last-accepted bid), the auction pays winners the unweighted median among the winning bids. This is unique in our collective experience. The result is that fifty percent of the winning bidders are offered a contract price less than their bids. This median pricing rule further encourages low-ball bids, since a low bid guarantees winning, does not impact the price, and gives the supplier a free option to sign a supply contract. Even if suppliers bid their true costs, up to one-half of the winning suppliers would reject the supply contract and the government would be left with insufficient supply. Others may accept the contract and cross-subsidize public patients with the revenue from private patients, or just take a loss. This pricing rule does not develop a sustainable competitive bidding process or healthy supplier pool.
The third problem arises from the use of composite bids, an average of a bidder’s bids across many products weighted by government estimated demand. This provides strong incentives to distort bids away from costs—the problem of bid skewing. Bidders bid low on products where the government overestimated demand and high on products where the government underestimated demand. As a result, prices for individual products are not closely related to costs. Bid skewing is especially problematic in this setting, since the divergence between costs and prices likely will result in selective fulfillment of customer orders. Orders for low-priced products are apt to go unfilled.
The fourth problem is a lack of transparency. It is unclear how quantities associated with each bidder are determined. These quantities are set in a non-transparent way in advance of the auction. Bids from the last auction event were taken in November 2009, and now more than ten months later, we still do not know who won contracts. Both quality standards and performance obligations are unclear. This lack of transparency is unacceptable in a government auction and is in sharp contrast to well-run government auctions such as the Federal Communications Commission spectrum auctions.
Click here to view the full letter.
Monday, September 20, 2010
USA Today Cites AAHomecare Dedication to Stopping Fraud
A front-page story in the September 20 USA Today reports on proposed regulations to crack down on Medicare and Medicaid fraud. The paper quotes Michael Reinemer of the American Association for Homecare saying, “Nobody is more anxious to stop fraud than we are because the legitimate providers are the ones that suffer.”
The proposed rule is open for comments, and final regulations will be published at the end of the year. To review the proposed rule, visit www.ofr.gov/inspection.aspx. Click here to read the full USA Today article.
BACKGROUND:
Members of the American Association for Homecare have zero tolerance for fraud. The Association has been frustrated that it has taken so many years for Medicare to deal effectively with the fraud problem at the front-end rather than relying on the pay-and-chase system of catching criminals after theft has occurred.
AAHomecare introduced an aggressive 13-point anti-fraud legislative action plan in 2009, parts of which were adopted in legislation proposed by Congress and enacted into law. See www.aahomecare.org/stopfraud. The 13-point plan includes proposals such as real-time claim audits, higher penalties for fraud, more federal funding for anti-fraud programs, and a dedicated anti-fraud office at the federal Centers for Medicare and Medicaid Services (CMS), part of HHS.
Two important anti-fraud measures in federal law took effect a year ago. One is an accreditation requirement: all providers of home medical equipment in Medicare must be accredited by an agency approved by CMS. This is a lengthy, expensive process that should have had a significant impact on fraudulent activity related to home medical equipment, or durable medical equipment. Second, home medical equipment providers are required to post a surety bond.
So a critical question is: What effect have those measures had on criminal activity? Have those measures had an impact on fraud numbers? Often, federal officials recite old numbers related to activity long before those two measures took effect. Now it’s important to review more current data, rather than out-of-date figures from 2007 or 2008. Also, discussions about fraud often conflate or blur separate issues such the “competitive” bidding program (a price-setting mechanism) or improper payments, which is not the same as fraud. Those distinctions need to be understood better by policymakers and the public.
The proposed rule is open for comments, and final regulations will be published at the end of the year. To review the proposed rule, visit www.ofr.gov/inspection.aspx. Click here to read the full USA Today article.
BACKGROUND:
Members of the American Association for Homecare have zero tolerance for fraud. The Association has been frustrated that it has taken so many years for Medicare to deal effectively with the fraud problem at the front-end rather than relying on the pay-and-chase system of catching criminals after theft has occurred.
AAHomecare introduced an aggressive 13-point anti-fraud legislative action plan in 2009, parts of which were adopted in legislation proposed by Congress and enacted into law. See www.aahomecare.org/stopfraud. The 13-point plan includes proposals such as real-time claim audits, higher penalties for fraud, more federal funding for anti-fraud programs, and a dedicated anti-fraud office at the federal Centers for Medicare and Medicaid Services (CMS), part of HHS.
Two important anti-fraud measures in federal law took effect a year ago. One is an accreditation requirement: all providers of home medical equipment in Medicare must be accredited by an agency approved by CMS. This is a lengthy, expensive process that should have had a significant impact on fraudulent activity related to home medical equipment, or durable medical equipment. Second, home medical equipment providers are required to post a surety bond.
So a critical question is: What effect have those measures had on criminal activity? Have those measures had an impact on fraud numbers? Often, federal officials recite old numbers related to activity long before those two measures took effect. Now it’s important to review more current data, rather than out-of-date figures from 2007 or 2008. Also, discussions about fraud often conflate or blur separate issues such the “competitive” bidding program (a price-setting mechanism) or improper payments, which is not the same as fraud. Those distinctions need to be understood better by policymakers and the public.
Whitfield Shines Light on Flawed Medicare Bidding Program
The Journal Enterprise, in Kentucky, reports that U.S. Representative Ed Whitfield (KY-01) stood up for Kentucky seniors and taxpayers today, raising questions over the effectiveness of a Medicare competitive bidding program.
The article quotes Whitfield as saying, “"While I agree that we need to find ways to reduce Medicare costs, I have concerns that the current competitive bidding pilot program is poorly designed and there is real concern that the entire program could collapse under its own weight, reducing the number of home care providers in rural areas, as well as increasing costs."
Whitfield is a senior member of the House Energy and Commerce Subcommittee on Health, which held a hearing on September 15 on competitive bidding. As The Journal reports, Whitfield has been an opponent of the program, citing concerns over the impact it has on local suppliers as well as beneficiaries.
Click here to read the full Journal article. To view video of Whitfield speaking at the hearing, visit the Congressman's YouTube page at http://www.youtube.com/WhitfieldKY01.
The article quotes Whitfield as saying, “"While I agree that we need to find ways to reduce Medicare costs, I have concerns that the current competitive bidding pilot program is poorly designed and there is real concern that the entire program could collapse under its own weight, reducing the number of home care providers in rural areas, as well as increasing costs."
Whitfield is a senior member of the House Energy and Commerce Subcommittee on Health, which held a hearing on September 15 on competitive bidding. As The Journal reports, Whitfield has been an opponent of the program, citing concerns over the impact it has on local suppliers as well as beneficiaries.
Click here to read the full Journal article. To view video of Whitfield speaking at the hearing, visit the Congressman's YouTube page at http://www.youtube.com/WhitfieldKY01.
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