Medicare Auction Failure: Early Evidence from the Round 1 Rebid

On November 2, nearly one year after bids were taken for the Centers for Medicare and Medicaid Services (CMS) auction for durable medical equipment, CMS announced the winning bidders. This paper examines the change in market structure in each of the nine service areas for the three largest product categories—CPAP, Diabetes, and Oxygen. The change in market structure is dramatic. The vast majority of existing suppliers both by volume and number will be excluded from supplying Medicare beneficiaries. This radical transformation of the industry is the result of a fatally flawed auction design and not the outcome of an efficient competitive process. The result will be immediate harm to Medicare beneficiaries and the vast majority of Medicare providers in the nine service areas covered by the auction. Beneficiaries will face poor service, selective fulfillment of orders, fraud, and other abuses. Existing suppliers will have to lay off employees and in many cases cease operation. The disruption in terms of job loss and involuntary supplier substitution will be large. Fortunately, the troubled program is still in the pilot stage, so the harm will be limited to the millions of Medicare beneficiaries and thousands of Medicare suppliers in the nine service areas covered in the pilot. Nonetheless, Congress and CMS should immediately stop the implementation of the Round 1 Rebid and move quickly to address the design flaws before the program is scaled up to the entire nation.