Economist continues campaign

Thursday, November 4, 2010

BALTIMORE - Economist Peter Cramton has developed a new model for competitively bidding DME that he says addresses the flaws in CMS's current program.

Cramton, a University of Maryland professor, has posted a draft of the model, which he is sharing with government officials and lawmakers, to his website, One of the components of the model: Making bids binding.

"I wanted to move beyond that the competitive bidding program has problems and try and solve those problems," he said. "What I wanted to do was put together a workable design that respects all of our existing knowledge of auction design and attempt to apply (it) to the Medicare application."

Cramton and 166 other bidding experts wrote letters to lawmakers in September and October criticizing competitive bidding. His views on the program have also been published in The New York Times.

The new model would make bids binding by, among other things, requiring providers to supply financial guarantees in the form of bid bonds or deposits proportional to their size.

"One of the biggest and most basic criticisms of CMS's program is that the bids aren't binding bids," Cramton said. "The bidder can just walk away from the bids and refuse to sign a contract. That is extremely problematic. There aren't any proper auctions that use that approach."

Another component of the model: Gathering bids in an online auction, and setting prices where supply and demand meet.

"Something that would be familiar to all of your readers--what Sotheby's does is start with a price and raise the price, and the price keeps rising to the point where no one is willing to bid higher, which determines the outcome," Cramton said. "Now, that's an auction to buy rather than an auction to sell, so we reverse that. We start at a very high price and we lower the price until supply and demand balances."

The model also proposes implementing competitive bidding in 10% of service areas each year for two years. The outcome of these auctions would then be used to establish the prices in the remaining 80% of services areas, with adjustments for cost of living and other factors.

"Losing suppliers would be excluded only from 20% of service areas," Cramton said. "Under CMS's proposal for Round 2, losing suppliers are excluded from 100% of service areas."

Even if a new model for competitive bidding were "perfect," the industry would have serious reservations, one stakeholder said.

"Competitive bidding does work in areas," the stakeholder said. "The question is a., can it work in this sector; and b., can CMS manage it? I think that's just as big of an issue."

Wall Street analysts aren't betting that CMS will change its course.

"We believe CMS has shut the door, for now, on real progress to change bidding rules for Round 2," according to an alert from Deutsche Bank sent on Nov. 3.

To learn more about Cramton's new model, go to