Consumer Power Report: Competitive Bidding Isn’t Competitive Enough

From: The Heartland Institute

Benjamin Domenech

Another August week, another Friday news dump: The Centers for Medicare and Medicaid Services announced last week it would dramatically expand its competitive bidding program, which has been criticized strongly by device manufacturers and auction experts. While the program is well-intentioned, critics claim (accurately, in my view) that the auction process is inherently flawed, designed to create disincentives for real competition. Here’s a report on the decision from The Hill [11], which indicates CMS is considering expanding the process beyond the current DME limits.

“The president has clearly acknowledged the need for further savings to implement (in) the Medicare program, but I think we also need to take stock and take credit for what’s been achieved so far, and from a CMS perspective, DME competitive bidding is one that we’re proud of and one we believe is working,” CMS Deputy Administrator Jonathan Blum said.

The competitive bidding program is limited to durable medical equipment – such products as wheelchairs, oxygen supplies and hospital beds. Blum said CMS is open to expanding competitive bidding outside of durable medical equipment in the future but is focused for now on expanding the existing program to more areas.

The chief problem with the program isn’t the intent so much as it is the design of the auction process, as my colleagues Matthew Glans [12] and Eli Lehrer [13] have detailed.

Despite the savings, the process has problems. The Centers for Medicare & Medicaid Services (CMS), which oversees it, has transformed a straightforward bidding process into a system that distorts all the incentives for buyer and seller. For reasons that confound academic experts on bidding (more than 150 signed a letter suggesting problems with the process), CMS selects a “median” price, not the lowest price. This means some providers get to sell a product for more than they bid.

Since sellers don’t have to honor their bid price, get-rich-quick opportunists can submit unrealistically low bids knowing they will get to sell at the “median” price. Even worse, CMS’s process has cut down on competition in the market by eliminating most suppliers from the approved list

As stories from the ground level indicate [14], this is a process that encourages companies to lowball bids to ridiculous points in order to shift the median figure. There’s no indication CMS even bothered to consult auction experts on how such a process ought to work, even though there are plenty of examples from throughout the rest of the federal government.