Caltech: Medicare’s Competitive Bidding Program “Severely Flawed”

Medicare’s competitive bidding program for home medical equipment is flawed and needs to be fixed in order to effectively generate competitive pricing and satisfy demand, found three auction experts from the California Institute of Technology (Caltech) in an academic paper. 

After experimenting with a couple different auction models, including the one designed by the Centers for Medicare & Medicaid Services (CMS), the researchers reported that competitive bidding “is not a good auction.” 

“The results reveal the existence and severity of its architectural flaws… and that the CMS auction cannot easily be fixed,” they said. 

CMS’s auction model sets the price of products based on the median of winning bids, and bids are nonbinding. This is a harmful strategy, say critics, because it allows providers to submit “low-ball” bids and then withdraw from the process if the median bid ends up being too low. 

Submitting that low bid carries no risk to the provider, and when multiple providers do this, it results in few of the bidding companies actually being able to afford the contract, causing them to cancel their offers and “crash the auction.” 

A better model is the excluded-bid auction, which “significantly outperforms” the CMS auction, according to the Caltech researchers. 

The government needs to ensure that Medicare beneficiaries are getting the medical equipment and services they require, and Congress should adopt the Market Pricing Program (MPP) rather than the competitive bidding one for home medical equipment and services, says the American Association for Homecare.

The MPP is an auction system to establish market-based prices around the country, and would require fundamental changes from Medicare to ensure the pricing program’s long-term viability. The program features binding bids and cash deposits to make sure only serious homecare providers participate in auctions, and is based on the clearing price rather than the median price for winning bidders. 

This market-based system would ensure that Medicare beneficiaries receive the services and equipment that they need and ensure that the government pays fair, competitive prices for the equipment and services provided,” states Tyler J. Wilson, president of the American Association for Homecare. “That makes it a win-win for taxpayers and beneficiaries.”

Written by Alyssa Gerace

Alyssa Gerace

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