How did we 'win' the mock auction?

Wednesday, May 25, 2011

I attended Professor Peter Cramton's "Mock Medicare Auction" on April 1 at the University of Maryland along with 122 other stakeholders from the industry, government, academia and the press. The purpose was to better understand how a free market auction designed by economic experts would work as a potential alternative to the current fundamentally flawed bidding program designed and implemented by Medicare. I was assigned to the Harry Truman & Co. team and was partnered with a Washington D.C. healthcare reporter. Even though both of us had limited knowledge in auction theory and design, we won the exercise as the most profitable company.

So how did we "win" the mock auction? We executed a relatively simple, multi-faceted strategy and followed Professor Cramton's specific directions not to bid lower than our unique total costs. We stayed within the high and low range automatically provided from round to round and adjusted our bid amount if it was too high and time remained in the bid window.

There were a total of seven rounds of bidding that commenced over about a three-hour period. Professor Cramton awarded a $25,000 bid bonus to each team that was successful in winning the bid for each of the six product categories as an incentive to bid all categories. My team won one bid bonus for Cleveland. I am convinced that we won the mock auction based on the execution of our strategy and being provided with what was likely a very favorable cost structure (individual team costs differed by product category and CBA).

Is this the alternative to address all the industry concerns with the current Medicare bidding program? As structured during the mock auction, absolutely not, but moving toward a modified version of the Cramton auction design would likely result in much better outcomes for all stakeholders--beneficiaries, providers and Medicare. The system designed by Professor Cramton and his colleagues provides transparency in the bid process and the bids submitted during the process were binding. Those two changes alone to the current Medicare bidding structure should yield much better results.

However, there are a few areas of concern with the Cramton auction model that should be evaluated and addressed prior to any formal application to DME. The Cramton mock Medicare auction model assumes providers know their total cost of providing products to beneficiaries within the CBA (most do not); it does not include a mechanism to ensure small provider participation (required by statute); and it does not include a floor price or safeguards to flag or check bids likely submitted well below cost.

Certainly the statement during the mock auction made by Tom Bradley, the chief cost estimator for health care at the Congressional Budget Office, indicating that the current Medicare bidding program "will fail with near certainty," is very powerful and helps further strengthen the position that it is fundamentally flawed. We could not ask for a better advocate than one of the top healthcare economists in the federal government.

The real challenge the industry is currently facing is how to stop a program destined to fail from being expanded to 91 additional areas where the bid process is set to begin early next year. The best way to do that right now is to closely monitor and report the negative outcomes that result from Round 1, which are occurring but do not appear to be surfacing at the level likely needed in order to get CMS to change course and stop the bidding program. In addition, we are starting to hear from our allies on Capitol Hill who support repealing the program that they need an alternative to "replace" competitive bidding to increase the level of support for repealing the program. They indicate that going back to the status quo, if competitive bidding were to be repealed, is not an option.

It appears we are at a crossroads that is going to require the industry to evaluate alternatives to the current competitive bidding model. Should that alternative be a modified version of the Cramton auction structure, or some other proposal that results in significant cost savings and provides the government an increased level of confidence that they are paying appropriately for DME items and services? Regardless of where we end up on the competitive bidding issue, such an alternative appears to be our only chance of improving on the Round 1 outcomes moving forward. hme 

Seth Johnson is the vice president of government affairs for Pride Mobility Products Corp. in Exeter, Pa.