PAOC meeting on Medicare competitive bidding: The train wreck hasn’t happened yet

Program Advisory and Oversight Committee (PAOC)

Dear PAOC Members:

On 5 April 2011, you met at CMS headquarters in Baltimore to examine the status of the Medicare competitive bidding program. I was grateful that the meeting was open to the public and that I had an opportunity to meet many of you. I was also grateful that I had an opportunity to voice my views. Some of you asked if I would put my comments in writing, so that it could be part of the public record. That is the purpose of this letter.

We learned from presentations by CMS that the train wreck predicted by auction experts and others has not yet occurred. The program was implemented in nine regions beginning 1 January 2011. Part of the reason is that it takes some time for inventories to run out, for companies to go out of business, and other indicators of failure to appear. Ninety days is too short a time to see the impact of a poor market design, especially given the grandfathering rules for continued service.

In addition, despite the fact that low-ball bidding, predicted by theory, was rampant (according to numerous bidder reports), the prices that came out of the auction’s bizarre pricing rule were made more reasonable by CMS’ manipulation of quantities. CMS can and did change the slope of the supply curve and hence the set of bids that were included in the median price. This non-transparent manipulation allows CMS to set nearly any price between the lowest and highest bid. Also, bids are already constrained by a floor and a ceiling. The “auction” is really not an auction at all, but an arbitrary pricing mechanism.

Despite the absence of a train wreck in the first 90 days, please do not sit back and conclude that all is well. One can think back on the early years of the California electricity market. Despite its poor design, the market appeared to work perfectly for more than two years before the market was stressed in late 2000 and crashed in crisis in 2001. The poor market design cost California tens of billions. The stakes are even higher here.

My comments during the public comment period are summarized in

“Public Comments of Peter Cramton at PAOC Meeting on Medicare DME Competitive Bidding Program,” 5 April 2011.

I have attached the comments, which are brief and to the point.

My final comment has to do with the creation of an independent market monitor. The market monitor is distinct from the PAOC and serves a different role. The market monitor has access to all the data available to CMS including confidential data. The market monitor is an expert in market design and in the Medicare DME market in particular. The market monitor is hired by and reports to the Secretary of the Department of Health and Human Services. The use of an independent market monitor is standard practice in complex markets like electricity markets. The approach has been adopted by all electricity markets in the United States. The market monitor brings valuable expertise. Market problems are more quickly identified and addressed with the use of a market monitor as an independent check. The market monitor has the responsibility to advise the Secretary, the PAOC, CMS and the public on the market. The market monitor has the responsibility to periodically report on the state of the market, typically quarterly. The market monitor does not make decisions with respect to the market. Decisions are made by CMS and the Secretary. The market monitor’s role is limited to advice and reporting.

Again, it was a pleasure meeting you in Baltimore. I hope my comments are helpful to the PAOC as we move toward the critical development of Round 2. My view is that it is essential to open the regulation to change. Pushing forward with the status quo¾an auction design that all experts agree is fatally flawed¾would be irresponsible. If you disagree with this sentence, then I urge you to study carefully the information on http://www.cramton.umd.edu/papers/health-care/. There is a wealth of independent and objective expert information there. As you can tell, I am a huge fan of transparency.

Many thanks for your public service.

Kind regards,

Peter Cramton

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