Auctioning Healthcare: The Need for a Clinical Trial of CMSS Competitive Bidding Program for Durable Medical Equipment

Abstract

Medicare’s competitive bidding regulations for Durable Medical Equipment (DME) create an acquisition program that has the form, but not the function, of an auction. Federal and academic experts have explained that CMS’ design for the bidding program violates accepted tenets of auction theory, selects an essentially random set of vendors, and results in a supply situation that is not viable.The goal of this document is to assess the consequences of two unorthodox decisions made by CMS in designing the program: 1) permitting non-binding bids; and 2) setting price equal to the median accepted bid. As the paper explains, these two rules result in CMS continuing to function in a price setting role – the antithesis of what auctions are intended to achieve. CMS’ approach to competitive bidding is in sharp contrast to that of the Federal Communications Commission. When the FCC was confronted with the need to develop an auction program, they: 1. Sought the input on auction procedures from game theorists; and 2. Subjected their proposed auction procedures to review by a “Clinical Trial,” i.e, by having auction specialists conduct simulations to assess its strengths and weaknesses and to recommend modifications.Accordingly, CMS should reform its bidding program to correct the fundamental problems on which there is broad consensus. Consequently, prior to Round 2 of the DME competitive bidding program, the agency should subject its DME bidding program to a Clinical Trial comparable to that conducted by the FCC.