A small pool in a big ocean

Let me be honest.

The first thought that ran through my head when I learned that the payment amounts for Round 2 were, on average, 45% below the current fee schedule, was, “Providers really shot themselves in the foot this time.”

I mean, this 45% isn't an arbitrary number, right? It's based on the bids that were submitted by real life, breathing HME providers, right?

Well, it turns out it may not be that black and white.

The VGM Group's Mark Higley wrote in a blog shortly after the payment amounts were announced that he believes the bidding program, as it's currently structured, gives CMS more control over picking the payment amounts than it may be letting on.

Higley explains how the large ocean of bids from which CMS determines the median is actually a small pool of bids. The agency starts with the capacity of the lowest bidder and moves up through the bidders until it meets its expected demand. It's from this pool that CMS determines the median, not the ocean.

Think of it this way: Say 10 bids come in at $1 through $10. If CMS based the payment amount on those numbers, it would be $5.5. But CMS starts with $1 until it meets demand, say at $4, and then it bases the payment on $1 through $4, making it $2.5.

Economist Peter Cramton at the University of Maryland echoed these concerns in a post to his website shortly after the payment amounts were released:

“It was not the bidders who set the prices, but CMS through its arbitrary manipulation of the quantities associated with each bidder. CMS was able to pick any price between the lowest bid made by any bidder and the highest bid made by any bidder through its selection of quantities. The CMS-set quantities are never revealed and never used for anything but setting the price. This is why the CMS process is not an auction at all, but an arbitrary pricing process.

“One thing is certain: These are not competitive prices set by the competitive bids of suppliers. And there is no basis to believe that the set of 'winning' suppliers includes those who can supply quality goods and services at least cost. Both the prices and the set of winners were arbitrarily set by CMS without any explanation. On this all experts agree. It is difficult to imagine a more flawed process.”

What I want to know: Who designed this program, anyway? If Cramton and more than 200 economists agree that it's flawed and unlike most of the auctions they've seen, who designed it?

Managing Editor Theresa pointed out that a recent FOIA request submitted by the Center for Regulatory Effectiveness mentions a National Technical Expert Panel that was convened by HCFA, now CMS, to gather feedback regarding the design of the program.

Did they design it?

Who did?