Brett Katzman


Ever bend the rules without actually breaking them? That’s one way to look at what is…

Georgia (Oct 25, 2013) — Ever bend the rules without actually breaking them? That’s one way to look at what is happening with Medicare’s competitive bidding process.

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The Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare program, has been using competitive bidding to secure durable medical equipment from suppliers for more than a decade. Their process, however, is getting backlash from economists and equipment suppliers alike.

One vocal economist is Kennesaw State’s Brett Katzman, who has researched competitive bidding, auctions and game theory since the mid-1990s. Katzman was named chair of the economics, finance and qualitative analysis department in the Michael J. Coles College of Business in April.

According to Katzman, CMS is not following some basic competitive bidding principles when it comes to using auctions to set prices for equipment for Medicare patients.

When CMS needs to purchase medical equipment, such as oxygen tanks or walkers, it gathers bids from equipment manufacturers.

CMS selects the winners based on the lowest bid and works upward until the total capacity is sufficient to satisfy the estimated demand – just like competition dictates, Katzman said.

However, the problem arises when the prices at which equipment providers are reimbursed are set at the median winning bid – not at the point where supply equals demand – which violates virtually everything economists know about the competitive process, he explained.

This flawed bidding system encourages lowball bids that do not reflect suppliers’ actual costs, which will result in equipment supply shortages, poor quality and increased fraud, Katzman said.

These results are likely to increase costs as Medicare beneficiaries are forced into more expensive options, he said. “When there is a high demand (for equipment) and a price too low for production, the supply cannot be met,” he said. “That means shortage.”

When essential medical equipment cannot be obtained because vendors are unable to produce the quantities needed, the people receiving Medicare benefits are the ones who suffer.

“Shortage is the ultimate demise of the entire competitive bidding process,” said Katzman. “But in terms of what it means for Medicare patients, it means that Grandpa can’t get the oxygen tank he desperately needs.”

A Decade of Research
Katzman’s research on Medicare auctions began in 2001, the year when the agency announced it would begin using auctions to set prices of durable medical equipment. His

research found deficiencies and loopholes in the Medicare bidding rules that would allow “gaming the system,” a creative way to work the bidding system but stay within the set rules.

“I see it as smart,” Katzman said with a smile. “But only when fundamental rules aren’t broken.”

Katzman’s research with auction designer Peter Cramton of the University of Maryland found too many flaws in Medicare’s competitive bidding process to just turn the other cheek, however. The economists published research in 2010 to confront the flaws in the median pricing rule and prove that Medicare’s auction was doomed for failure.

It gained the attention of U.S. Rep. Nancy Johnson, who was instrumental in bringing competitive bidding to Medicare initially and was growing wary of the way it was being implemented. After meeting the researchers on several trips, she urged Congress to step in and modify the Medicare auction as it was rolled out nationwide. Her push to Congress caught the eye of Georgia Rep. Tom Price, a physician, who introduced House bill 6490 last fall.

The bipartisan House bill would enact the Market Pricing Program (MPP), an alternative system championed by Katzman to replace the current Medicare bidding program for durable medical equipment. The MPP insists each bidder use true costs as a dominant strategy, resulting in competitive equilibrium and full efficiency, he explained.

Taking a Stand
As an economist, Katzman is an advocate for competitive bidding. He believes that low prices are good for Medicare, but prices that are too low are harmful.

“To me, it’s all about doing what’s right,” he said. Katzman isn’t alone. He is among nearly 250 economists and academic experts who want changes to the Medicare bidding system. They want regulations to be transparent and based on best available science. And they want it changed for the benefit of the people.

Industry equipment manufacturers aren’t happy about Medicare’s competitive bidding program, either. Expert advice, with all of its scientific rigor, has not yet convinced CMS to change its course, however. Katzman hopes House bill 6490 will.


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