1、Auction Design for Medicare Durable Medical Equipment,Peter Cramton Professor of Economics, University of Maryland Chairman, Market Design Inc. www.cramton.umd.edu29 March 2011 Updates at www.cramton.umd.edu/papers/health-care,1,Motivation,2,Unfunded Medicare expenses,3,About $70 Trillion!,Diabetes
2、Medicare costs,4,Managing health at home and keeping out of the hospital is essential to controlling costs,CMS design flaws,5,An efficient “clearing-price auction”: demand = 7; price = 8th lowest bid,This is how markets work; it is the most common auction format.,Inefficient CMS auction: demand = 7;
3、 price = 4th lowest bid,This CMS design has never been used anywhere.,Median pricing rule together with non-binding bids creates strong incentive for low-ball bids,Submitting a low-ball bid is a good strategy Bid has a negligible impact on the price paid Gives the bidder the option to sign a supply
4、contract if the price is sufficiently attractive Adverse selection: Low-ball strategy especially attractive for Small and less informed bidders who dont have the time or resources to adopt a more sophisticated strategy Desperate bidders on verge of bankruptcy Low-quality bidders more apt to engage i
5、n fraud or corruption If more than 50% of the bidders (by number, not volume) submit low-ball bids, then the price will be unsustainably low, leading to shortages, poor service, fraud and corruption Prices are not related to costs,8,Lack of transparency,Unclear how bidder quantities are determined C
6、ritical input in pricing and winner determination Pricing becomes arbitrary decision of CMS Winners not disclosed until 1 year after bids taken in November 2009 Unclear quality standards Unclear performance obligation Lack of transparency makes auction vulnerable to litigation (see http:/goo.gl/utfI
7、q),9,Pricing is arbitrary, since bidder quantities determined in non-transparent way by CMS,10,Median = $7 when CMS does not discount quantities at all.,Pricing is arbitrary, since bidder quantities determined in non-transparent way by CMS,11,Median = $12 when CMS discounts quantities by 50%.,Eviden
8、ce of program failure extremely strong,Theory Equilibria of CMS auction are at best strategically chaotic Most plausible equilibrium results in complete market failure Experiment Lab experiments at Caltech clearly demonstrate poor performance in a simplified environment Lab experiments at Maryland f
9、urther demonstrate poor performance in additional environments Field Experience with pilots in 2008 and 2009 suggests failure,12,Part 1: Summary,13,Competitive bidding can result in large cost reductions without sacrificing quality, but it must be done right!,Proposed design addresses flaws in CMS p
10、rogram,Bids are binding commitments Each bid binds the bidder to particular performance obligations depending on the auction outcome Bids are made credible through Rigorous qualification one month before auction Bid bond proportional to bidders capacity Returned to losing bidders at end of auction R
11、eturned to winning bidders after posting performance guarantee Performance bond proportional to a winners capacity Returned when performance obligation met Financial guarantees add a modest cost but protect legitimate HME providers from being crowded out by poor or fraudulent suppliers Engages compe
12、titive banking market in financial review Banking and capital markets determine worthy providers, not CMS Auction establishes market clearing price for each item defined by product and region Price paid to all providers is the clearing price that balances supply and demand Prices found in a simple p
13、rice discovery process that allows for both substitution and complementarities across categories Prices are not capped at current levels,14,HME = Home Medical Equipment = DME; CMS = Centers for Medicare & Medicaid Services,Capacities based on historic supply,Each existing provider is assigned a capa
14、city based on its supply for category and region in prior 3 years, with most recent year given most weight (one block of capacity is about 1 percent of total volume) Each qualified new provider is assigned a capacity of 1 block (about 1 percent) Variation: the number of blocks can vary from 100 to 2
15、00 depending on the product-region to allow for different market sizes and minimum efficient scales Any provider may supply more than its capacity, but its capacity is assumed in matching supply and demand and in setting performance obligations Capacities are determined in objective manner,15,Auctio
16、n competition comes from new entrants,Since capacities of existing providers are set to equal approximately 100 blocks (100% of demand), excess supply comes from the desire of new entrants to supply at the current auction price The price keeps declining until new entrants are unwilling to supply or
17、a sufficient quantity of existing providers exit the market to offset the new entry Given relatively low entry costs, especially from providers supplying in other regions or other categories, ample new entry can be expected at prices above competitive levels Financial guarantees assure bidders exit
18、at prices below competitive levels,16,Winning bidders and prices,As soon as supply falls to 100 blocks or less, the clearing price is set at the exit bid of the bidder that caused supply to fall to 100 or less Each bidder still in wins its capacity If supply is less than 100 blocks, the blocks won i
19、s scaled up to 100/Supply Example: If with supply at 101, a bidder with 10 blocks exits at $34 and supply falls to 91; the clearing price is $34; and block won are scaled-up by 100/91 If multiple bidders exit at the clearing price, then exits are accepted to minimize the shortfall from 100 blocks (l
20、arger bidders first in event of tie),17,Post-auction competition motivates quality,After the auction, the winners compete for Medicare beneficiaries by offering quality products and services An HME provider offering better quality will increase market share, which will lead to a higher capacity in f
21、uture auctions Medicare beneficiary choice is not only maintained but is an important driver to motivate providers to provide high quality products and services,18,Prices of individual products are relative to the price of the lead product in the category,For each category, lead product is the produ
22、ct with the greatest dollar volume based on 2009 data or greatest correlation with cost of other products in category In qualification stage, for each category of interest, the bidder reports the relative price of each product as a percentage of the lead products price The auctioneer computes the re
23、lative price index for the category as the capacity-weighted average of the bidder reports The auction determines the price of each lead product in each category; other individual product prices are determined from the relative price index Example: Oxygen concentrator = $100; portable gas cylinders
24、have a relative price of 15%, so are priced at $15,19,Optimization of categories, products, and regions,As a result of medical innovation, new products will be introduced and some old products will be eliminated This evolution of products to conform to state-of-the-art practices is essential Regions
25、 are an aggregation of adjacent counties within a particular state for which cost factors are quite similar Product categories are defined to include a set of highly complementary products Absolute prices for products within a particular category should tend to move together If they do not, then the
26、 category should be split into multiple categories that do share within-category price movement Product categories, products, and regions should be re-optimized for the new auction approach The approach can easily accommodate more product categories, products, and regions Optimization of categories,
27、 products, and regions is an essential task in the product design step with major input from HME providers,20,Version 1: 100% auctioned on rotating basis,Each year one-third of regions are auctioned with 3-year contracts 3 groups of regions (West, Central, East) Structure facilitates capture of geog
28、raphic complementarities 1 group auctioned each year Establishes competitive prices in area for 3 years Losers are excluded from supply in area Provides incentive to stay in auction Variation: each year one-half of regions are auctioned with 2-year contracts Shorter commitment period encourages flex
29、ibility and entry In either case, contract commitment extends to term of agreement with individual patients Example: In last month of contract, provider supplies hospital bed to patient under 12-month rental agreement; provider is committed to patient regardless of whether the provider wins a supply
30、 contract in the next round,21,Preferred variation: Auction a representative 10% each year,Approach does not disrupt market structure Emphasis is on establishing competitive prices, rather than excluding suppliers Apply competitive bid-based prices to non-auctioned areas Auction a representative 10%
31、 of regions each year Auction establishes prices in remaining 80% with a simple econometric model based on the two most recent auctions Each year a different 10% is used, so over 10 years each region is auctioned once In auctioned regions, only winners can supply during the two-year commitment perio
32、d Winners still must compete within the region Any certified supplier can supply in any non-auctioned region (80% of country),22,Auction is easy for bidders,Price process is easy for bidders to manage Bidders interested in a particular category can focus on that category in all areas Bidders interes
33、ted in a particular region can focus on that area in all categories Bidders with other interests can focus on the most relevant categories and areas for them Auction completes in a single day (or perhaps two for initial auction) Auction system is easy to use and requires no special software; a moder
34、n browser is all that is required Proxy bids allow small bidders to bid as in a sealed-bid auction,23,Auction is highly transparent,Qualification and financial guarantees are reported publicly well in advance of the auction Capacities determined in objective manner Auction rules including product de
35、finitions, performance obligations, and penalties are known two months before auction Following each bidding round, excess supply at current prices as well as prices for next round are publicly announced Winners and quantity won are immediately announced at the conclusion of the auction The auction
36、results are certified by CMS within 48 hours of the auction end An independent market monitor reports on auction outcome and any problems within two weeks of auction end,24,Proposed design based on proven methods,Clearing price approach used almost universally across all countries and industries Cle
37、aring price balances supply and demand Leads to efficient assignment of supply to demand Simultaneous descending clock format has outstanding price discovery Allows simple arbitrage across substitutes Allows acquisition of a complementary portfolio of product categories Efficiently aggregates inform
38、ation among many bidders to reduce the possibility of winners curse Approach proven in hundreds of auctions for spectrum, electricity, gas, diamonds, emission allowances, etc.,25,Proposed design based on proven methods,Bidders are bound by bid bonds and performance bonds to guarantee the integrity o
39、f the bidding, as in all well run auctions Relative price index used to 1) assure bidders win complementary within-category products and 2) greatly simplify auction and improve liquidity Approach use with great success in rough diamond auctions (BHP Billiton, since 2008) and electricity auctions (ED
40、F, since 2001) Transparent auctions commonly used in highly successful government auctions FCC spectrum auctions, since 1994 Electricity auctions regulated by FERC, since 1998, in CAISO, ERCOT, ISO-NE, Midwest ISO, NY ISO, PJM Emission auctions conducted by RGGI (carbon), since 2008 In sharp contras
41、t, the CMS design with non-binding bids and the median pricing rule has never been used in any country or industry,26,How best to get to the long-run solution?,Transition to an efficient auction as soon as possible Substantial evidence that prices from November 2009 are erroneous Theory (Cramton and
42、 Katzman 2010) Caltech experiments (Merlob et al. 2010) CMS red flags about program integrity Radical change in market structure (Cramton 2010) Savings will be greatest the sooner we move to a sustainable auction that identifies competitive prices and least-cost suppliers,27,How best to get to the l
43、ong-run solution?,Design automatically starts small even though it is applied nationwide Only a small fraction of regions auctioned each year With prompt action by CMS first auction could take place in fourth quarter 2011 for 1 January 2012 start Well-designed auction greatly reduces staff time spen
44、t on Addressing disputes Managing fraud and abuse Putting out fires Well-designed auction enables CMS staff to focus on critical tasks of Qualification Guarantees Performance monitoring,28,Next step: Medicare auction conference,An opportunity for collaboration among DME providers Medicare beneficiar
45、ies Government agencies (HHS, CMS, CBO, OMB, CEA) Congressional staff Auction experts Key goals To discuss key issues of an auction approach To demonstrate how an efficient auction works To debate the merits of the auction approach,29,Medicare auction conference,Sponsors National Science Foundation
46、University of Maryland Date and venue 8:30am to 5pm, Friday, 1 April 2011 Inn and Conference Center, University of Maryland College Park MD About 110 participants (40 government, 70 non-government),30,Medicare auction conference: Outline,Registration and Breakfast (8am) Welcome (8:30am) Peter Cramto
47、n, Professor of Economics, University of Maryland Jonathan Blum, Deputy Administrator, CMS A proposed auction approach for Round 2 (9am), Peter Cramton How it works Why it addresses the problems of the current CMS approach (Round 1 Rebid) Morning break (9:45am) Auction demonstration (10:15am), Peter
48、 Cramton and Larry Ausubel, University of Maryland A mock auction is conducted with all participants using the proposed rules and a commercial auction platform. Each team is given a specific business plan and asked to maximize profits. There are four steps: Description of the mock auction environmen
49、t Description of the auction platform and the mechanics of bidding Running of the auction (first few rounds) Lunch (12:15pm) occurs after approximately 1 or 2 rounds of bidding Running of the auction (remaining rounds) (1:15pm) Presentation of auction results First panel: Sustainability, market stru
50、cture, and beneficiary choice (2:15pm) Moderated by Lance Leggitt, Chair, Federal Health Policy, Baker Donelson Paul Gabos, Chief Financial Officer, Lincare Amy Law, Vice President Government and Healthcare Strategy, KCI, Inc. Nancy Lutz, Program Director, Economics, National Science Foundation Joel Marx, Chairman, Medical Service Company Zachary Schiffman, President, United States Medical Supply,
