[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]








 MEDICARE'S DURABLE MEDICAL EQUIPMENT COMPETITIVE BIDDING PROGRAM: HOW 
                      ARE SMALL SUPPLIERS FARING?

=======================================================================

                                HEARING

                               before the

               SUBCOMMITTEE ON HEALTHCARE AND TECHNOLOGY

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 11, 2012

                               __________





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            Small Business Committee Document Number 112-084
              Available via the GPO Website: www.fdsys.gov

                                _____

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
                     ROBERT T. SCHILLING, Illinois
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                        JANICE HAHN, California
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director








                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hon. Renee Ellmers...............................................     1
 Hon. Cedric Richmond............................................     2

                               WITNESSES

Laurence D. Wilson, Director, Chronic Care Policy Group, Centers 
  for Medicare and Medicaid Services, Baltimore, MD..............     3
Peter Cramton, Ph.D., Professor of Economics, University of 
  Maryland, College Park, MD.....................................    15
Tammy Zelenko, President/CEO, Advacare Home Services, 
  Bridgeville, PA................................................    17
Randy Mire, Owner, Gem Drugs, Reserve, LA........................    19

                                APPENDIX

Prepared Statements:
    Laurence D. Wilson, Director, Chronic Care Policy Group, 
      Centers for Medicare and Medicaid Services, Baltimore, MD..    31
    Peter Cramton, Ph.D., Professor of Economics, University of 
      Maryland, College Park, MD.................................    43
    Tammy Zelenko, President/CEO, Advacare Home Services, 
      Bridgeville, PA............................................    62
    Randy Mire, Owner, Gem Drugs, Reserve, LA....................    76
Questions for the Record:
    Chairman Graves Questions for Laurence Wilson................    83
    Chairwoman Ellmers Questions for Laurence Wilson.............    85
Answers for the Record:
    Wilson Answers for the Record................................    86
Additional Materials for the Record:
    Statement of the Health Industry Distributors Association....    91
    ``Competitive Bidding for Durable Medical Equipment: An 
      Estimate of the Economic Impact on Iowa,'' by Ken Brown, 
      Ph.D.......................................................    95
    National Association for the Support of Long Term Care 
      Statement for the Record...................................   101
    The VGM Group Statement for the Record.......................   106
    Statement of Charles R. Plott for the Record.................   114
    Hogan Hansen Statement for the Record........................   120
    A Market Pricing Program to Fix Medicare's Bidding System for 
      Home Medical Equipment and Services Statement for the 
      Record.....................................................   131
    Response to the Congressional Hearing on Medicare's Durable 
      Medical Equipment Competitive Bidding Program by Peter 
      Cramton....................................................   136

 
 MEDICARE'S DURABLE MEDICAL EQUIPMENT COMPETITIVE BIDDING PROGRAM: HOW 
                      ARE SMALL SUPPLIERS FARING?

                              ----------                              


                      TUESDAY, SEPTEMBER 11, 2012

                  House of Representatives,
         Subcommittee on Healthcare and Technology,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:10 a.m., in 
room 2360, Rayburn House Office Building, Hon. Renee Ellmers 
(chairwoman of the Subcommittee) presiding.
    Present: Representatives Ellmers, King, and Richmond.
    Also Present: Representatives Shilling and Thompson.
    Chairwoman Ellmers. Good morning, this hearing will come to 
order. I want to thank the witnesses on both panels for 
testifying. We appreciate your participation.
    I would like to at this time welcome Representative 
Thompson. Mr. Thompson is from Pennsylvania, a former committee 
member who has requested and received permission to sit on the 
panel for today's hearing. We welcome Mr. Thompson today.
    We also have with us Mr. King from Iowa, who also will have 
some questions to submit or some statements from constituents, 
is that? Yes. Thank you again for being part of this.
    We are here today to assess the Medicare durable medical 
equipment competitive bidding program and its impact on 
patients, small business suppliers, and the implications for 
program expansion. Congress mandated the use of competitive 
bidding to establish payment rates for high cost and high 
volume DME in the Medicare Modernization Act of 2003. Congress 
took this action in response to evidence that Medicare fee 
schedule payment rates often far exceed retail prices. In fact 
in some cases Medicare beneficiary copays exceeded the cost of 
the device on the open market. These generous payment rates 
also made the DME benefit especially vulnerable to waste, fraud 
and abuse. A successful small scale test required through the 
Balance Budget Act of 1997 showed that the competitive bidding 
for DME was feasible.
    The Centers for Medicare and Medicaid Services implemented 
a competitive bidding process for nine DME product categories 
in nine geographic areas on January 1, 2011. This first phase 
of implementation is known as Round One. The competitive 
bidding program will soon undergo significant expansion beyond 
the initial nine metropolitan statistical areas, or MSAs. The 
Affordable Care Act, which we will be referring to as ACA, 
expanded the program so that Round Two includes an additional 
91 MSAs. CMS is now assessing supplier bids for Round Two with 
the intent that competitively bid prices in these 91 MSAs take 
effect in mid-2013. The ASA directed the Secretary of the 
Department of Health and Human Services to use competitively 
bid prices nationwide beginning in 2016.
    The DME supplier industry as well as the many small 
businesses that operate in this industry have long had concerns 
about the use of competitive bidding. Before we expand the 
program more than tenfold it is important to understand these 
concerns, not only because numerous patients rely on medical 
equipment to keep them in their homes and out of the hospital, 
but also because many of the suppliers are small businesses 
that make up the fabric of our economy.
    Most of us can agree that it is important for Medicare to 
pay a responsible price for durable medical equipment so that 
beneficiaries and taxpayer dollars are used wisely. CMS has 
reported that the competitive bidding program resulted in $202 
million in savings in 2011. These first year program savings 
are derived largely from competitive based payment amounts that 
are on average 32 percent lower than DME fee scheduled prices, 
and these lower prices mean the beneficiaries are paying less 
in the form of their 20 percent coinsurance.
    Lower prices for patients as well as for taxpayers are 
something all of us can celebrate, but how those prices are 
obtained and the methods by which the small business suppliers 
are allowed to participate and compete fairly are crucial to 
this program. We must seek to ensure that this program protects 
patient access to vital products needed while giving small 
business suppliers the environment to grow and thrive. While I 
strongly believe in the competitive forces of the private 
market, the process by which the competition is conducted must 
be fair and truly competitive.
    To help the Subcommittee understand the success and 
challenges associated with Round One before the program's 
scheduled expansion next year we will hear from witnesses, 
industry experts, as well as small business owners who 
collectively provide a balanced range of perspective on the 
competitive bidding program.
    Again, I want to thank all of our witnesses today for being 
here.
    And now I would like to yield to Ranking Member Richmond 
for his remarks.
    Mr. Richmond. Thank you, Madam Chairwoman, for this very 
productive and timely hearing. It is no secret that our 
Nation's population is beginning to age and many of our Baby 
Boomers are now turning 65 years old. A projected 72 million, 
roughly one-fifth of the U.S. population, will be that age or 
older by 2030.
    As more Baby Boomers age into Medicare, the program is 
becoming increasingly vital to our health care system. Medicare 
serves 50 million seniors and people with disabilities. That is 
nearly 1 in 6 Americans.
    It is also a program served predominantly by small 
businesses. Small firms are an essential part of the health 
care market and fill many of the gaps larger businesses either 
cannot or will not. In fact small suppliers constitute over 90 
percent of the Nation's medical equipment providers. Today's 
hearing will shed some light on their importance to Medicare.
    The Centers for Medicare and Medicaid Services Competitive 
Bidding Program for Durable Medical Equipment, or DME, was 
implemented in nine metropolitan areas in 2011. The initiative 
allows Medicare to award contracts for durable medical 
equipment to suppliers with the lowest bids. This bidding 
system was supposed to ensure beneficiary access to quality 
medical supplies and services while reducing out-of-pocket 
expenses and improving the effectiveness of DME payments.
    While CMS estimates the savings from the first year to be 
202 million, it is not clear that the new COMPETITIVE BIDDING 
PROGRAM is achieving this goal without driving small firms out 
of business. Instead there is evidence that many DME small 
business providers have already gone out of business or soon 
will go under. This issue is of particular concern to me, 
because New Orleans is one of the areas selected to implement 
competitive bidding in Round Two. Like a number of my 
colleagues, I have some concerns about the impact on small 
firms in my district. We should all be doing what we can to 
mitigate the impact that these changes will have on these 
firms.
    It is also important to me that CMS work with Congress and 
stakeholders to ensure that Medicare beneficiaries have access 
to care and service from their local supplier. It is perfectly 
appropriate for Congress to take a hard look at competitive 
bidding and its impact on small suppliers.
    With that I would like to take this opportunity to thank 
all the witnesses for being here. I look forward to hearing 
your perspectives on this vital matter. Thank you and I yield 
back.
    Chairwoman Ellmers. Okay, at this time we will proceed and 
I would just like to ask that if any of the Subcommittee 
members have an opening statement prepared, I just ask that 
they submit it for the record.
    Just to briefly go over the light system that we have, you 
will have 5 minutes to deliver your testimony. The light will 
be green. When you have 1 minute left it will turn yellow and 
then it will turn red. I ask that everyone try to adhere to the 
limited time. I know we have a number of questions, so that 
will just help this move along.
    So with that I would like to introduce Mr. Laurence Wilson, 
Director of the Chronic Care Group with the Centers for 
Medicare and Medicaid Services in Baltimore, Maryland. He has 
responsibility for a broad range of health care benefits, 
including post acute care, home health dialysis, and durable 
medical equipment. Welcome, Mr. Wilson, good to see you again. 
You have 5 minutes for your testimony.

STATEMENT OF LAURENCE D. WILSON, DIRECTOR, CHRONIC CARE POLICY 
 GROUP, CENTERS FOR MEDICARE AND MEDICAID SERVICES, BALTIMORE, 
                               MD

    Mr. Wilson. Good morning and good morning, Ranking Member 
Richmond and distinguished members of the Subcommittee. I am 
very pleased to be here today to discuss the durable medical 
equipment prosthetics, orthotics and supplies competitive 
bidding program. This important initiative required under the 
Medicare Modernization Act of 2003 and recently expanded under 
the Affordable Care Act has been effective in reducing 
beneficiary out-of-pocket costs, improving the accuracy of 
Medicare's payments, reducing over utilization and ensuring 
beneficiary access to high quality items and services.
    CMS successfully implemented the program on January 1, 
2011, in nine metropolitan areas after making a number of 
important improvements based on new requirements from Congress 
and after listening to feedback from our stakeholders. We are 
pleased to report that the program has saved $202 million in 
its first year of operation, a reduction of over 42 percent 
compared to 2010, with no reduction in access or negative 
health consequences for our beneficiaries. We are now 
continuing with the expansion of the program to 91 additional 
areas of the country as the law requires.
    CMS worked closely with stakeholders to design and 
implement the program in a way that is fair for suppliers and 
sensitive to the needs of beneficiaries. In particular, the 
program includes specific provisions to promote small supplier 
participation. First, CMS worked in collaboration with the 
Small Business Administration to develop a new more 
representative definition of a small supplier. CMS then 
designed policies linked to this new definition to help small 
suppliers. For example, the final regulation allows small 
suppliers to band together in networks in order to meet program 
requirements. The regulation also employs a formula to ensure 
that multiple contract suppliers are selected for each of the 
product categories in an area, so lots of suppliers are awarded 
a contract.
    Most importantly, the regulation established a special 30 
percent target for small supplier participation in the program. 
CMS was very pleased that we exceeded this 30 percent target in 
the nine Round One areas, with 51 percent of contracts going to 
small suppliers.
    The program also includes numerous protections for 
beneficiaries. It results in a large number of winners so that 
beneficiaries are assured access and choice and there will 
continue to be competition among contract suppliers on the 
basis of customer service and equality. In addition, the 
program thoroughly screens bids and bidders, includes quality 
standards and accreditation, and employs financial standards 
and other safeguards to weed out bad actors while ensuring 
accurate and sustainable payment amounts and providing a level 
playing field for legitimate suppliers.
    CMS has carried forward the many improvements to the 
program made by Congress and CMS to successive rounds. These 
changes provide for a fair process that is less complex for 
suppliers to navigate and result in more effective scrutiny of 
suppliers' qualifications in the integrity of their bids. We 
continue to be open to further improvements as the program 
expands.
    Our experience with the Round One Rebid has shown that 
competitive bidding brings value to Medicare beneficiaries and 
taxpayers compared to the old fee schedule system. In fact, 
average price discounts across the nine metropolitan areas are 
about 35 percent. The CMS actuary projects that the program 
will save $25.7 billion for Medicare over 10 years, and an 
additional $17.1 billion for beneficiaries through lower 
coinsurance and premiums.
    An example of the price savings, in Charlotte, North 
Carolina the purchase amount of a standard power wheelchair 
dropped $1,089. That equates to an $871 savings for Medicare 
and the taxpayers and a further $218 savings for the 
beneficiary in terms of reduced coinsurance.
    More importantly, our state-of-art monitoring system 
reveals no trends related to patient health status or access to 
care that cause us concern. This system tracks over 3,400 data 
points, including things like mortality, utilization, 
hospitalization, hospital length of stay, emergency room visits 
and many others to provide us with information about the health 
of Medicare beneficiaries and the services they receive.
    As the program expands in 2013, we will continue to rely on 
our extensive network built around our national ombudsman, 
local ombudsman, regional offices, CMS case workers, 
contractors and Medicare call center to address questions and 
concerns and be prepared to act swiftly on behalf of 
beneficiaries and suppliers. And in summary, we will continue 
to be thoughtful and diligent in our implementation of this 
important program as it expands to more areas of the country 
and opens to further improvements.
    Again, I appreciate the invitation to testify before you 
today and would be very happy to take any questions you may 
have.
    Chairwoman Ellmers. Thank you, Mr. Wilson. I will begin my 
questioning. My first question has to do with the nonbinding 
nature of the bids. Given the significant opposition to the 
lack of binding bids as a part of the competitive bidding 
program as well as numerous testimony by both economists and 
auction experts, why has CMS chosen to make bids submitted by 
suppliers nonbinding?
    Mr. Wilson. Chairwoman, that is an important issue that we 
looked at very closely. We took notice of the letter sent to 
the administration by a number of economists and by Dr. 
Cramton, who is here today. We met with him, we looked at that 
issue very closely. I think there are two issues that prevented 
us from moving in that direction. One, we are talking about a 
health care program where we are providing health care services 
to patients in their homes. So forcing a supplier to provide 
services to a patient in their home may not result in the best 
outcome for a patient. I think that is one concern.
    The other concern is Medicare is a voluntary program for 
suppliers, for beneficiaries. Our ability to force them under 
current law to do something they don't want to do does not 
currently exist. That is, we don't have the authority to do 
that under current law. But again, I think one of the main 
concerns is what does that mean for beneficiaries.
    The other point that I would mention on this as well is 
that I am not aware of any particular proposal even in the 
industry's legislation that would get us to the point where we 
could bind suppliers. The industry's legislation merely applies 
a stiff financial penalty to small and other suppliers, and I 
am not sure that is fair either for a supplier that just can't 
do it.
    Chairwoman Ellmers. One of the main concerns in that area 
is for those providers that end up turning down the contractors 
after the bid process that CMS continues to include that 
calculation of the bid amount. If they backed out, if they put 
the bid in play and they maybe realize that they can't actually 
provide that and then they back out, why then does the bid not 
leave with them and then have a chance for another bidding or 
the next subsequent bid be considered?
    Mr. Wilson. Sure. Very good question. Another issue that we 
looked at very closely in rulemaking. I guess at the outset I 
would say that wasn't a particular problem that we had. I think 
suppliers accepted 92 percent of the time, they accepted their 
contract so we were very pleased to see that. When you looked 
at the bids that were not accepted about half the prices were 
above, half were below. But more importantly, whether they 
accept the contract or not, the bids that they submit are 
scrutinized very carefully under a bona fide bid process. If 
they are on the low end, we would ask for price lists from 
manufacturers, invoices, or other information to validate that 
they could provide the item and any associated services for 
that price. So we are comfortable that the information we are 
putting into the price is appropriate. And, at the end of the 
day, if we were to go back and have to reset the prices if 
someone turned down a contract, then others may deny their 
contract and there would be multiple iterative rounds until we 
finally got all of the contracts in place, because even if you 
were to do this approach, some prices could go down for items, 
some could go up. Everybody provides a different mix of items 
and so there is no assurance that everybody would be satisfied 
with the ultimate product. So we really just have to go with 
the best information that we have up front.
    Chairwoman Ellmers. Along that line is there a concern that 
50 percent of the winning bidders are offered contracts at 
prices that are less than their bids? Does that fall in line 
with that information that you have just given us?
    Mr. Wilson. I think that is another important issue that we 
looked at very closely in rulemaking. We considered whether to 
set the price at the pivotal bid or the high price point for 
the winners, whether to set it at the low point or whether to 
set it at the median the way we do for a number of different 
Medicare payment systems. This is not a procurement, a 
government procurement, it is not an auction, this is a 
Medicare payment system that utilizes competition under the 
Medicare statute. So it is different than some of the things 
that you may hear with respect to auctions for commodities and 
things like that. So I think what we were trying to do was 
recognize that we wanted a good price point that suppliers 
would accept and would result in good products, good items 
being provided to our patients, which is the most important 
thing for us.
    Chairwoman Ellmers. Mr. Wilson, one of the issues that has 
been raised by many of the small business owners and the 
suppliers and constituents is that 80 percent, 80 to 90 percent 
of American businesses are being excluded in this program. At 
the May 9th Ways and Means hearing you used Pittsburgh as an 
example of success. In 2010 there were approximately 815 
suppliers in Pittsburgh; however, there were only 60 winning 
suppliers in the program. The other 700 plus no doubt are small 
businesses like neighborhood pharmacies which offer DME as a 
sideline for service and customer satisfaction when a physician 
prescribes it. You eliminated close to 750 suppliers, or at 
least 93 percent of the Pittsburgh small businesses, thereby 
selectively excluding 95 percent of the industry. With such a 
drastic reduction in the number of small business suppliers in 
the marketplace, do you believe that excluding more than 95 
percent of small businesses previously providing quality DME 
products is having a positive or a negative impact on patient 
access to these vital products and services?
    Mr. Wilson. I think one of the most important things for 
us, there are two goals in this program, one is to provide 
savings on behalf of our taxpayers, on behalf of beneficiaries 
and on behalf of the Medicare program. The second part is 
really to ensure that patients continue to get what they need. 
We have monitored very closely in all nine areas access, health 
status, and we don't have concerns that patients aren't getting 
what they need. So at the outset I would just like to be clear 
that we are very, very sensitive to that issue and are doing 
quite a bit to monitor that on a biweekly basis.
    With respect to the number of suppliers, I think it is 
important to remember, and I do recall the Pittsburgh example, 
I used a North Carolina example today, so I will provide that 
for you. If you look at a place like Charlotte, there are 951 
suppliers, but only 207 have Medicare revenues higher than 
$10,000. So for most of the suppliers, Medicare is a very small 
part of their business. I don't want to minimize $10,000 that 
could be important to a small business. But, at the same time, 
that is not the main part of their business, it is probably a 
very, very small part. So, you know, a lot of suppliers are 
providing things like retail diabetic test strips. These are, 
as you said, community pharmacies, that is not even included in 
the Medicare program. Others are providing off-the-shelf 
orthotics, we have not bid those. They may be orthotists. So we 
are not excluding all of the providers. I think that is sort of 
an inaccurate picture of what the program is doing.
    I provide another number as well. I think when you look at 
the total number of suppliers in the nine areas in 2010, it was 
just over 23,000. In 2011 that went down by about 1.5 percent. 
If you look in competitor areas that we track as part of our 
monitoring there were about 2,000, but that went down a little 
bit too by about negative 1.2 percent. So to the extent that we 
see suppliers going out of the program, it is very small and it 
is not just an occurrence in the nine competitive bidding 
areas, but it is a more general trend.
    Chairwoman Ellmers. Would you say that looking at it from 
that perspective of the products that they offer, was this an 
effort by CMS to better control the small business suppliers so 
that you have a better idea of who you are dealing with or----
    Mr. Wilson. I think there are benefits in terms of 
oversight to the program because it employs financial standards 
and erects other checks to allow suppliers to participate, so I 
think it has benefits for program integrity. But, our point in 
pursuing the program wasn't to somehow eliminate suppliers. The 
statute requires that there be winners and there be losers. It 
also requires that suppliers bid. So, if you look at Charlotte 
again, you know, there were 207 suppliers that had Medicare 
revenues over $10,000; only 115 of them bid, and about half of 
those got contracts.
    Chairwoman Ellmers. Okay, great. I do have a couple more--
--
    Mr. Wilson. I----
    Chairwoman Ellmers. Oh, I am sorry, I thought you were 
finished.
    Mr. Wilson. I am.
    Chairwoman Ellmers. I was going say I do have a couple more 
questions but at this point I would love for the rest of the 
Subcommittee to chime in with theirs, so I will now turn to 
Ranking Member Richmond for his questions.
    Mr. Richmond. Thank you and thank you, Director Wilson, for 
being here.
    From the comments and the calls that we received and the 
input that we sought out, what we got back about Round One was 
that people faced several problems initially in the bidding 
process from taking excessive time to input data and that data 
was lost or there was incorrect disqualification of suppliers, 
which I think caused you all to extend the time at some point 
on those bids. Now you are moving into Round Two. What have you 
all done or what are you all going to do to make sure that we 
don't have those types of problems for Round Two?
    Mr. Wilson. Thank you. I think the problems that you are 
describing are ones that we experienced in our 2008 round, 
after which Congress delayed the program and I think the 
picture you provided does accurately describe some of the 
problems that we had. We went through a process, talking with 
our stakeholders and, of course, implementing provisions of the 
MIPPA law in 2008 to make some improvements to the program. 
These improvements were things like redevelopment of the online 
bidding system so we don't have problems with people losing 
information, streamlining the financial documentation 
requirements, putting in a process that Congress required 
where, to the extent a supplier was missing a financial 
document and may otherwise be disqualified, they would get a 
second bite at the apple. We would get to contact them and say, 
hey, you are missing your balance sheet, could you send that, 
and they would send it. So we put in those kinds of 
improvements.
    Education was very important. In the 2008 round we didn't 
get to educate early enough and we didn't focus in on some of 
the issues that we ultimately learned to be of concern for 
small suppliers so we educated earlier, and it was targeted on 
specific issues that were problematic, in particular, the 
financial documentation requirements. We really, really focused 
in on auditing and verifying the information in the bids, and 
checking licensing of suppliers to make sure only licensed 
suppliers were coming into the program. So a lot of different 
things that we did both on process and on sort of ease of use 
for suppliers were put in place before we went to this current 
round which was effective in 2011. And I think the reaction 
that we got was positive from those that we heard from with 
respect to the system. I think there are other improvements 
that could be made, there were still a few little glitches in 
the electronic system but we were able to work through those, 
there were no delays and no big issues with people losing 
information.
    Mr. Richmond. Thank you and actually you answered probably 
a couple of my questions all in that one.
    Earlier you mentioned in an attempt to help small 
businesses that they could band together and form networks to 
bid. How many actually did that?
    Mr. Wilson. In the Round One Rebid in 2011 we have three 
network bids and one that was awarded a contract. So, we didn't 
see a lot of bids but we still could in this next round.
    Mr. Richmond. Are you all doing anything to encourage it or 
to educate the small suppliers on the ability to do that or the 
advantages to doing that?
    Mr. Wilson. Absolutely. I think we ought to be and we are 
educating suppliers, small suppliers about the availability of 
that option. So it is part of our online educational toolkit. 
The online bidders conferences and the other materials that we 
have. We do discuss this option and present the details of it. 
We don't encourage people to bid in a certain way, they have to 
make that business decision on their own, but we want to 
provide all the information so that they can.
    Mr. Richmond. The other thing you mentioned was the 8 
percent that were awarded a contract and ultimately declined 
not to sign. What was the predominant reason or give me a 
little demographic about that 8 percent? And I know we look at 
it as 8 percent, but I went to one of those funny little high 
schools where an A was 93 to 100, so you are right around a B-
plus range. So what does that 8 percent look like?
    Mr. Wilson. The only information I have about the 8 
percent--I don't know why they didn't accept, we didn't ask 
them. I think the information that I have is what I shared with 
Chairwoman Ellmers, which is that when you looked at their bids 
they didn't not accept because their bid was higher than the 
price or lower than the price, it sort of cut both ways. So it 
was obviously for some other business associated reason.
    And we can--I can check if there is more information 
available on that. I will go back to the staff and ask.
    Mr. Richmond. One other one. There appears to be two 
different criteria in the mail order diabetes suppliers, that 
they have to bid based on their complete list of diabetic 
supplies while small suppliers bid and win by using a smaller 
list of low cost products. Is that by design, is that accurate?
    Mr. Wilson. That is not accurate, that is not a 
requirement. What I would say is that Congress put in place a 
requirement, we call it the 50 percent rule, where under the 
national mail order program for diabetic supplies their bid 
must reflect 50 percent of the products on the market. So it is 
really geared towards ensuring that all the most popular brands 
are included in their bids, and that is what we are 
implementing as part of the national mail order program.
    Mr. Richmond. Do you all currently have bids out right now?
    Mr. Wilson. Yes, yes, sir. Under the Round Two and national 
mail order program we received bids and are currently 
evaluating them. We would expect to, sometime later in the 
fall, announce the prices from that program; early next year 
announce the bid winners, and then we would put those prices 
and contracts into effect on July 2013.
    Mr. Richmond. Okay. Madam Chairwoman, thank you and I yield 
back.
    Chairwoman Ellmers. Okay, at this time I would like to 
introduce my colleague from Iowa, Mr. King, for his questions.
    Mr. King. Thank you, Madam Chair. Director Wilson, I 
appreciate your testimony. First, I would like to introduce 
into the record three reports, one of them from the VGM Group, 
the durable medical equipment competitive bidding report, and 
competitive bidding report also from Dr. Ken Brown, University 
of Northern Iowa, that is dated July 18, 2012, and a Hogan-
Hansen study on Medicare's ability to accept beneficiary calls, 
that is August 13, 2013.
    Chairwoman Ellmers. Without objection, so ordered.
    Mr. King. Thank you, Madam Chair. Director Wilson, I do 
appreciate your testimony and I know that taking the directive 
of Congress and turning it into actual effect is a difficult 
task. And a series of things I think about as I listen to your 
testimony and I expect there will be three witnesses behind you 
that would like to have testified first so that the questions 
that they might pose could be directed to you, and I am going 
to try to anticipate some of that.
    What happens under this proposal to patient choice? If 
there is a patient that has a provider that they have a 
tradition with and they appreciate the service and quality of 
that service, what happens to patient choice?
    Mr. Wilson. I think there are a few features of this 
program which support patient choice. One, we have a formula 
here for selecting the contractors that really goes towards 
ensuring that there are multiple contractors, contract 
suppliers selected for each region or each competitive bidding 
area. So lots of suppliers means choice for beneficiaries. It 
also means that those suppliers, they compete amongst each 
other on the basis of customer service and quality in order to 
get patients.
    Mr. King. Can----
    Mr. Wilson. I think it's important to get that consistency, 
if I may, you are talking about, sir, that there is a 
grandfathering provision, a feature that allows suppliers to 
maintain their relationship for the equipment with patients and 
the majority of suppliers, even though they didn't within a 
contract, and so the majority of suppliers did maintain 
relationships with their beneficiaries.
    Mr. King. I know what the grandfather clause does, it takes 
away some of the resistance in the short term but eventually 
ends up with the same result in the long term and that would be 
the result of who are awarded the contracts. And this so it 
does--in at least one of these reports that I have introduced 
into the record will be I think an effective rebuttal to that 
position, whatever the intent is, then that result I think is 
perhaps different. But the suicide bid issue, and I will--just 
as I don't know how many government contracts I have bid, I 
spent my life in the contracting business. We bid on low bid, 
we put a bond out on the table, a 10 percent bid bond, for 
example. So if we are going to bid a million dollar project we 
put $100,000 cash equivalent in the middle of the table, and 
that might be a certified check or it might be a bid bond, but 
it puts my capital out on the line. And what it says is I am 
serious about this bid. And if I am the successful bidder and 
offered the contract, and I don't complete the contract, I 
don't sign the contract provide performance and payment bonds 
to replace the bid bond I forfeit my bid bond. So it is ante up 
$100,000 to bid a million dollar project that says my word is 
good, not to finish the contract, just to enter into it. And 
then in order to enter into it I have to provide a performance 
and payments bond.
    Does the statute allow you to write rules that set 
standards of bid bonds so that you don't have suicide bids and 
you don't have people backing out of those contracts.
    Mr. Wilson. It does not provide us the authority to do what 
you described, sir.
    Mr. King. What prohibits you then from enforcing such an 
authority at the discretion of the executive branch?
    Mr. Wilson. If that authority were put in place?
    Mr. King. If it doesn't specify that authority, what is out 
there in statute that would prohibit you from asserting that 
authority?
    Mr. Wilson. Well, this is a program with a prescription and 
a statute on how it is designed. We have talked about this 
issue with our general counsel. We don't see that we have 
authority to do it.
    Mr. King. Did you want to do that? Was it something you 
looked at from the beginning though and you wanted to put more 
standards in?
    Mr. Wilson. I have some concerns about an approach that 
forces suppliers, small suppliers, to pay a large penalty. I 
also have a concern about forcing suppliers to provide health 
care services to a beneficiary in their home when they don't 
want to.
    Mr. King. Now----
    Mr. Wilson. But I think it is worth considering.
    Mr. King [continuing]. You do write the specifications for 
the bid, correct, and you have the statutory authority to do 
that?
    Mr. Wilson. Yes, sir, to write specifications.
    Mr. King. And you spoke--sometimes they bid things in not 
exactly the same way so it is hard to match up apples to apples 
in your earlier testimony. Can't you write those specifications 
so that they are direct and specific and then in order to get a 
product here that is going to be apples to apples and going to 
be legitimate bidders, can't you come to Congress and ask us to 
fix this so that you do have the authority to have a legitimate 
competitive bidding process rather than one that opens the door 
up for suicide bids?
    Mr. Wilson. Well, I am not aware of any suicide bids. We 
put in a process to address that issue, it is called a bona 
fide bid process.
    Mr. King. Well, you can audit but don't enter into it, so 
those would be the ones defined as suicide bids. If the 
chairwoman would indulge me.
    Chairwoman Ellmers. Without objection, please continue.
    Mr. King. I am concerned about a bidding process that 
leaves the door open to that. But the other specific question 
that I am very interested in is how you selected--how you 
selected the median bid as the standard on what to basis your 
award. Is a median bid out of three bidders, is that a 
legitimate measure, at what level do you have enough bids that 
a median bid tells you anything? And why wouldn't you come back 
to us and say we want these people bonded and we want to award 
it to the lowest bidder?
    Mr. Wilson. Well, I think the way this program was set up 
we had a very high demand target, a cushion because what we are 
trying to guarantee is patient access, that is the most 
important thing, so lots and lots of suppliers, so we have a 
very high demand target. That makes it comfortable using a 
median measure when you have lots and lots of bidders and lots 
and lots of contract awards. So we are very comfortable that we 
get--and that also has an upward effect on price by the way. So 
we are very, very comfortable in terms of patient access with 
the approach that we use. And we think the prices are also 
quite reasonable, particularly in the context of many of the 
reports that we see from the OIG and the GAO on acquisition 
costs for oxygen, wheelchairs and other products.
    Mr. King. I will just say this, large companies will like 
this, small companies will not. Thank you, and I yield back.
    Chairwoman Ellmers. Thank you. At this time I would like to 
introduce my colleagues from Pennsylvania, Mr. Thompson, for 
his questions.
    Mr. Thompson. Thank you, Chairwoman, and the ranking member 
for your courtesy in allowing a former member of the small 
business committee to rejoin today on a very important topic.
    Director Wilson, Laurence, it is good to see you, I want to 
thank you for your longtime service in the chronic care 
division at CMS. This obviously, to me this is a very important 
topic for me when I not too many years ago, BC, before 
Congress, I was working with individuals facing life changing 
disease and disabilities. That is how I ran my paycheck to 
support my family, and my off hours I ran as an EMT. So I was 
out in homes in the middle of the night seeing folks who were 
relying on this durable medical equipment and the service that 
comes with that equipment to really be able to have improved 
quality of life and to be as independent as possible. And I 
have tremendous concerns obviously with the competitive bidding 
process. And I support competition, but this is a system that I 
am concerned with the competition as it is defined in this 
program. I think it is flawed.
    I was pleased to hear your willingness to make changes. You 
indicated that, and frankly we are right on track with the two 
principles, having a responsibility to the Medicare beneficiary 
and responsibility to the taxpayers. When you look at 
Pittsburgh market which is closest to obviously my home, 93 
percent loss of providers, I have to hope, I would hope, but I 
wonder whether CMS is really taking a look at long-term impact 
of that. What we do today is for today, but the seeds that are 
planted for tomorrow I think could be devastating. You can't 
have competition when you begin to lose businesses, when you 
shrink that competitive pole. And then there is the whole 
question of people that are bidding in this process, they may 
not be in the communities to provide the access. I can tell you 
oxygen is great as long as you have somebody that is a phone 
call away, and frankly minutes away in the middle of the night 
when you run into problems with it. You need that, in all 
durable medical equipment you need that access, that technical 
assistance. And frankly that is not something--we think about 
this pricing this thing on the equipment but it really is a 
full package.
    So I really appreciate what you said about opening to 
change, so I am going to propose some change for you and run it 
by you. I think you are familiar with the proposal for the 
market pricing system with durable medical equipment. What are 
your thoughts on market pricing program as a proposal in terms 
of saving the same amount of money, fairness to providers and 
frankly assuring the beneficiaries access?
    Mr. Wilson. And good to see you, sir. Very interesting 
proposal. We have not talked with representatives of industry 
about it. I did have the opportunity to read the statutory 
language. I guess at the outset I would have a few concerns. 
One--we have a successful program that is working, this program 
would seem to require about 8 years to implement. We have 
iterative, multiple rounds of rulemaking, Paperwork Reduction 
Act, IT development, multiple rounds of contracting. So I don't 
see this program being implemented before about 8 years. It 
took about 5 years to implement the current program and this 
has again multiple processes built in that would require 
additional time.
    So I think that is a concern, because again we have a 
program that is providing beneficiaries what they need and is 
saving dollars for taxpayers and beneficiaries in Medicare.
    I think there are some other things there. We talked about 
choice a little bit today. This assigns patients essentially to 
certain small suppliers, it has a small supplier target that 
says they get 30 percent of the business. The only way to 
implement that is to assign a patient to a supplier and take 
away their choice. That is a concern for me. So I think there 
are some issues and concern there that need to be addressed, 
but I don't see replacing a system that is working for one that 
has some problems.
    Mr. Thompson. And I think that at least from my 
perspective, I question whether it is working, I question 
whether we really have a handle on what the long-term effects 
of this are as we put small businesses out of business and as 
we lose jobs, as we decrease that pole for competition. 
Competition is really a good thing, it generally results in 
lower costs and higher quality. But if you create monopolies 
then it is an issue. So just say that my worst nightmares over 
the next period of time become a reality, does CMS have the 
statutory authority to implement changes that would be 
consistent with a market pricing program?
    Mr. Wilson. There are many features of the market pricing 
program that we would not have statutory authority to do. Some 
of them we may have statutory authority to do, I have not 
reviewed it with general counsel to I think answer all those 
questions. I think with respect to applying a bond, performance 
bond, that is something, to lock in the bidders, that is 
something we cannot do to look under the statutory language. 
But there are other things as well that I think we would have 
problems, but we would need to review that from a legal 
perspective I think to answer that question adequately for you. 
But I think some of the fundamental features would require 
statutory change.
    Mr. Thompson. Thank you. Thank you, Chairwoman.
    Chairwoman Ellmers. Thank you, and I do have one additional 
question for you, Mr. Wilson. You mentioned the GAO and a 
recent report by the Government Accountability Office concluded 
that although the first year of the competitive bidding 
program, Round One bidding process was completed, it is too 
soon to determine its full affect on Medicare beneficiaries and 
DME suppliers.
    GAO also found also that the first--within the first 6 
months of 2011 patient utilization of some competitively bid 
products declined in some areas. Do you agree that it is too 
early to call this program a success? You are saying the 
program works, but isn't it a little early, especially based on 
what the GAO is saying, and does the decline in patient 
utilization mean seniors didn't have access to the care they 
needed?
    Mr. Wilson. Very good question. The GAO looked at about 6 
months of data, we are working on close to a year and a half 
through our monitoring program. They don't have that type of 
monitoring program. We did share that information with them. So 
I think we are very pleased with the success of the program and 
very confident at this point. I think we have to remain 
vigilant though and we have to be open to change. So I am not 
just comfortable sitting back on my laurels and telling the 
staff not to think about where we are making improvements and 
not to look and see that beneficiaries--to be sure that 
beneficiaries are getting what they need. We need to do that. 
So that is sort of the perspective that we come to on this and 
lots of our programs, it is the reason why we invested in some 
of the monitoring systems. We have the same type of monitoring 
system for the new ESRD system that I work on because we want 
to make sure that end stage renal disease patients are getting 
the services that they need in light of the fact that we have 
put in a new payment system.
    So I think that is the perspective that we bring to this 
and I apologize, Chairwoman Ellmers. I think you had another 
part of your question and I missed that.
    Chairwoman Ellmers. No, no, you basically answered for me. 
Again you feel at this point that it is successful. I guess the 
question was do you feel that patients' access to the durable 
medical equipment in any way is being jeopardized?
    Mr. Wilson. No, no, I do not. We put in place a system to 
help beneficiaries and to help suppliers. So we have a national 
ombudsman, local ombudsman, we have case workers, we have a 
contractor call center, we have lots of different resources to 
help suppliers and help patients when they need something. So 
that is what we have invested in heavily.
    As we move to Round Two in 91 additional areas it is 
vitally important that we carry forward all those resources an 
expand them to meet the needs of patients. And as far as 
utilization goes, utilization is not a measure of whether 
patients have access or are receiving good quality care, it is 
no secret that there has been overutilization in the Medicare 
program, particularly in places like Miami and a few other 
places around the country. So when we look at utilization data 
and look at utilization going down, that is an expected result. 
When we see a significant swing, the reason why we monitor that 
allows us to go in and check. And I will give you just a very 
quick example being respectful of your time. We saw mail order 
diabetic supplies, the volume going way, way down. So we went 
out and we surveyed 200 beneficiaries to see why they were no 
longer ordering. They had ordered before in 2010, they were not 
ordering supplies in 2011. All of them had many, many months 
supply. I think over 60 percent had over 10 months supply. So 
we saw that there was rampant overutilization under the prior 
system, and that is something that we need to try to correct.
    Chairwoman Ellmers. Well, thank you, Mr. Wilson. I really 
appreciate your participation today. We will continue to 
closely monitor this program to ensure that small suppliers are 
treated fairly. You are excused now at this time, thank you. 
However, I would like to ask that you identify the person--is 
there someone here from CMS that will be staying? Great. That 
will be helpful to sit in for the second panel. And if you 
could just make sure that we submit name and title, that would 
be helpful. So thank you very much, Mr. Wilson, for your time. 
I truly appreciate it.
    Mr. Wilson. Thank you.
    Chairwoman Ellmers. I now call the second panel to come 
forward and be seated at the witness table.
    Thank you to our second panel. We appreciate your 
testimony.
    I just want to say, just to reiterate the button system. 
You will see the little talk button there. When you are going 
to give your testimony or answer questions you want to just 
push that button, it will shine red. You will have 5 minutes to 
submit your initial testimony after I introduce you. And we 
will just try hard to keep to that amount of time so we can be 
respectful to everyone's time today. This is a very, very 
important Subcommittee hearing and I know that you have a lot 
of information that you would like to share with us. Again as 
far as the system goes you will have 5 minutes. It will be 
green, when have you 1 minute left it will be yellow and then 
it will turn red.
    I will start off by introducing Dr. Cramton, Ph.D., a 
professor of economics at the University of Maryland. Dr. 
Cramton has conducted research on auction theory and practice 
with his main focus with design on auctions. He received his 
bachelor of science and engineering from Cornell University and 
his Ph.D. in business from Stanford University. Welcome, Dr. 
Cramton, you have 5 minutes for your testimony.

  STATEMENTS OF PETER CRAMTON, PH.D., PROFESSOR OF ECONOMICS, 
   UNIVERSITY OF MARYLAND, COLLEGE PARK, MD; TAMMY ZELENKO, 
  PRESIDENT/CEO, ADVACARE HOME SERVICES, BRIDGEVILLE, PA, ON 
 BEHALF OF THE AMERICAN ASSOCIATION OF HEALTH CARE; AND RANDY 
  MIRE, OWNER, GEM DRUGS, RESERVE, LA, ON BEHALF OF NATIONAL 
               COMMUNITY PHARMACISTS ASSOCIATION

               STATEMENT OF PETER CRAMTON, PH.D.

    Mr. Cramton. Thank you very much.
    Today I speak on a matter of great significance to our 
future, Medicare auction reform. Without the effective use of 
market methods to control costs, Medicare is unsustainable.
    This is why it is essential for Congress to step in and 
insist that CMS replace its fatally flawed action program with 
an efficient auction.
    My testimony is that of an independent auction expert. I 
have spent in excess of 1,000 hours studying the CMS program. 
My work has involved five main steps: Identify the problems in 
the CMS design, develop an efficient Medicare auction based on 
best practice and science, educate the stakeholders about the 
problem with the CMS design, educate the stakeholders about how 
the problems with the CMS design can be addressed, and convince 
stakeholders that a reformed Medicare auction does indeed work.
    Let me start with a point of consensus. Small businesses 
are the engine of innovation to allow the U.S. economy to grow 
and prosper. We only need to think of Apple, Google and 
Microsoft. These former small businesses are the true job 
creators. Indeed, consensus will be a theme in my remarks. 
There is no disagreement among experts about what I will say 
and the issue is nonpartisan.
    The fatal flaws the CMS auction design were first 
identified by auction experts in September 2010. One hundred 
sixty-seven distinguished experts sent a letter to 
congressional committees pointing out the flaws. Congress 
responded with numerous letters to CMS and HHS demanding action 
but CMS failed to act. As a result of this inaction in June 
2011, an expanded group of 244 experts, including four Nobel 
laureates, wrote to the White House again urging action. I 
summarize from the letter. The flaws in the action administered 
by CMS are numerous. The use of nonbinding bids together with 
setting the price equal to the median of the winning bid 
provides a strong incentive for low ball bids. This leads to 
complete market failure in theory and partial market failure in 
the lab.
    Another problem is the lack of transparency. Quantities are 
chosen arbitrarily by CMS, enabling a large range of prices to 
emerge that have no relation to competitive market prices. The 
CMS competitive bidding program violates basic principles of 
regulation, especially the principles of transparency and of 
basing regulations on the best available science. Indeed, the 
current program is the antithesis of science and contradicts 
all we know about proper market design.
    Since the writing of our letter in September, several of us 
have done further detailed scientific study to explore the 
properties of the CMS design and contrast it to modern 
efficient auctions.
    The findings are dramatic and illustrate the power of 
science to inform auction design.
    Specifically, auction theory was used to demonstrate the 
poor incentive properties of the CMS design and how these lead 
to poor outcomes. Laboratory experiments were conducted at Cal 
tech and the University of Maryland that demonstrate that these 
poor theoretical properties are observed in the lab.
    Finally, some of us have studied extensively the Medicare 
settings, speaking with hundreds of DME providers and 
beneficiaries, and developed a modern auction design for the 
setting that is consistent with the best practice and market 
design methodology.
    This design step was far from a theoretical exercise. In 
April 2011 a Medicare auction conference was conducted at the 
University of Maryland to show how the modern auction methods 
work and how to conduct a nearly full scale demonstration of an 
efficient auction. Over 100 leaders in government and the DME 
industry attended the event. The mock auction achieved an 
efficiency of 97 percent. In sharp contrast the CMS auction 
exhibited efficiencies well below 50 percent in the laboratory.
    The complete lack of transparency is inappropriate for a 
government auction. We know now that CMS also had complete 
discretion with respect to setting prices in a nontransparent 
way. It is now clear that the CMS design is not an auction at 
all but an arbitrary pricing process.
    Sincerely, 244 auction experts.
    In contrast, the proposed market pricing program is a 
reformed Medicare auction based on best practice and science. 
MPP addresses each of the flaws identified in the CMS design. 
Nonbinding bids and the median pricing rule are easily fixed. 
MPP makes bids binding commitments, the median pricing rule 
replaces the clearing price, the price at which supply and 
demand balance. MPP uses a simple and effective auction 
mechanism, the simultaneous descending clock auction. The 
auction format has been used for over 10 years in many 
industries with great success. Through theory, experiment and 
practice, MPP has been shown to achieve least cost sustainable 
prices.
    One point on CMS's assertion that the CMS auction saves 
money: I am reminded of the saying my dad taught me, ``figures 
don't lie, but liars do figure.'' The CMS cost savings of $42.8 
billion is a gross overestimate. The number has no basis in 
fact. It simply scales up an erroneous $202 million number to 
the entire country for each of the next 10 years.
    CMS----
    Chairwoman Ellmers. Dr. Cramton, I am going to stop you 
there just because we have gone over a little bit, but what we 
will have you do is submit the remainder of your testimony for 
the record, okay? And then we will move on. And I know we have 
many questions for you. So thank you.
    Mr. Cramton. Thank you.
    Chairwoman Ellmers. At this time I do--our next panelist is 
Ms. Zelenko, and actually Mr. Thompson from Pennsylvania is 
going to introduce her.
    Mr. Thompson. Thank you, Chairwoman. It really is an honor 
to introduce our next witness, Tammy Zelenko. Tammy, Ms. 
Zelenko, is the president and CEO of Advacare Home Services in 
Bridgeville, Pennsylvania. She purchased Advacare in 1999 when 
it had 10 employees and 1 location, and today it has 47 
employees and 4 locations. And she is testifying on behalf of 
the American Association for Homecare.
    Welcome, Ms. Zelenko, and thank you, Chairwoman.

                   STATEMENT OF TAMMY ZELENKO

    Ms. Zelenko. Thank you. Thank you so much.
    Good morning, Chairwoman Ellmers, Ranking Member Richmond 
and members of the Subcommittee. My name is Tammy Zelenko, and 
I am president and CEO of Advacare Home Services, and we serve 
about 2,000 patients with 4 locations.
    Advacare specializes in respiratory care, which means we 
serve patients with COPD and other lung diseases, along with 
frail seniors who need help in order to live safely in their 
homes.
    You may also know us as durable medical equipment 
providers, or DME. DME is an essential and extremely cost-
effective component of our Nation's continuum of care. For a 
few dollars per day, home-care providers like me enable 
patients to be discharged from hospitals to home. We help 
control the Nation's healthcare costs by providing the 
equipment and services. We allow Medicare to reap savings by 
preventing hospital and ER visits and reducing exceptionally 
high, expensive institutional care.
    DME represents about 1.4 percent of the annual Medicare 
budget; however, falling payment rates and sharply rising 
regulatory burdens make it extremely difficult to continue to 
provide quality services without compromising care.
    As a member of the American Association for Homecare and 
the Pennsylvania Association of Medical Suppliers, I am very, 
very grateful that you held this meeting. The poor designed 
bidding program has needlessly harmed hundreds of small 
providers like me and has eliminated 85 percent of providers 
from participating in the program in the nine areas included in 
round one. How can we truly have a competitive program if the 
program is designed to eliminate competitors?
    As the bidding program now expands to another 91 areas 
throughout the United States, small providers face severe cuts 
and arbitrary exclusion from the Medicare participation. There 
is no doubt thousands of good providers will be driven out of 
business as a result of this expansion.
    As you alluded to, 10,000 baby-boomers turning 65 every 
day, need for cost-effective home care is growing. 
Unfortunately this bidding program is destroying the 
infrastructure to help supply that demand. In spite of the 
rhetoric from Medicare about the set-asides for small 
businesses, let us be clear: This bidding program is anti-small 
business. It is a business and job killer.
    We do not oppose market-based pricing or a well-thought-out 
auction system. In fact, we endorse an alternative system 
developed by auction experts who design bidding systems for a 
living. We are often the eyes and ears of the elderly living in 
their homes. We create a customized care plan based on 
physician orders and patient-specific goals, and we communicate 
critical information to the physician. This is what enables 
patients with acute care or chronic needs to remain in their 
homes, safe and independent. However, there are costs to 
providing this level of care.
    These are not simple commodities we are providing. As a 
business owner, I have always been able to compete against the 
local, regional and national providers within my market. Each 
year I gain market share, grow my business and receive 
recognition due to the outstanding service that my company 
provided. But all of that changed overnight when I lost the 
Medicare bid.
    The bidding program for me and thousands of providers like 
me has created the biggest barrier to my company's survival. 
The government should not ration benefits or otherwise bar 
qualified providers from serving Medicare beneficiaries.
    As I prepared for the bidding program, I made my business 
as lean and as efficient as possible. I invested in electronic 
medical records, purchased GPS tracking devices, and invested 
in a new billing system. And I really believed that that would 
save me and that that would prepare us for the bidding program. 
I was wrong. This is the first year that I did not grow my 
company, the first time that I had to pass on all of the 
healthcare premium increases to my employees, and the first 
time that I had to limit reimbursement for continuing 
education, and the first time I had to give away my Medicare 
patients.
    Before the bidding program began, my company competed based 
on the level of service we provided through education, clinical 
assessment and follow-up. But now, because of the severe design 
faults, this bidding system has eliminated my opportunity to 
compete in my communities where I have invested in physical 
locations, inventory, vehicles, and highly-trained staff.
    In closing, more than 200 economists and auction experts 
have warned CMS that the current bidding program will fail if 
significant modifications aren't made. These experts designed 
an alternative program called the Market Pricing Program. It 
achieves sustainability, market-based pricing; it preserves 
access to quality care; and it gives small providers like me a 
fighting chance for survival. Please give us this chance by 
enacting the market pricing.
    Thank you.
    Chairwoman Ellmers. Thank you for your testimony, Ms. 
Zelenko.
    Chairwoman Ellmers. At this time we will be introducing our 
last panelist Mr. Mire, and my colleague Mr. Richmond will do 
that.
    Mr. Richmond. Madam Chairwoman, it is my pleasure to 
introduce our next witness, Randy Mire, the owner of Gem Drugs 
located in my district, actually two locations. Gem Drugs has 
been in business for over 35 years and offers a wide range of 
medical services to the community.
    Just this year Mr. Mire was awarded the Small Business of 
the Year Award from the River Region Chamber of Commerce. He is 
testifying today on behalf of the National Community 
Pharmacists Association, which represents pharmacists, owners, 
managers, and employees of more than 23,000 independent 
community pharmacies across the country, and he has just 
survived Hurricane Isaac, so I am glad to have you here today.
    Welcome, Mr. Mire, Ms. Zelenko, and Dr. Cramton. Thank you.

                    STATEMENT OF RANDY MIRE

    Mr. Mire. Chairwoman Ellmers, Ranking Member Richmond, and 
distinguished members of the Subcommittee, I want to thank you 
for holding this hearing on Medicare's competitive bidding 
program for durable medical equipment. I would also like to 
take this opportunity to thank Chairwoman Ellmers for her 
cosponsorship of H.R. 1936, the Medicare Access to Diabetes 
Supply Act.
    I am honored to be here to discuss my experience as a small 
business community pharmacy owner and what impact competitive 
bidding would have on my business as well as access to care for 
the patients that I serve. My name is Randy Mire, and I own Gem 
Drugs in Reserve and Gramercy, Louisiana. I attended Tulane 
University, where I was a commissioned officer in the Army; 
also Loyola University, where I received a bachelor's of 
science degree and a doctor of pharmacy degree from Xavier 
University College of Pharmacy.
    With over 25 million people, or 8.3 percent of the 
population of the United States, suffering from diabetes, this 
is a national issue. In my State of Louisiana, over 10.3 
percent of the population have been diagnosed with diabetes, 
which is far above the national average. The patients I serve 
are mostly minority populations that are indigent, with limited 
mobility. On a daily basis I witness patients who do not 
receive their DME supplies through the mail on time and need a 
short supply from me to get through. And I have seen firsthand 
this problem with the recent flooding in Louisiana.
    My patients turn to me and my pharmacies to provide them 
with the DME supplies that they desperately need when they have 
nowhere else to turn with their mail-order supplies. With 
countless hoops that the community pharmacies must already 
undergo to provide DME, I do not provide these supplies solely 
for profit. Obtaining DME accreditation, possessing a surety 
bond, complying with the burdensome documentation requirements, 
and receiving much slower-than-normal payments are all in order 
for me to provide a spectrum of care to all of my patients.
    I am honored to spend time with my patients in face-to-face 
counseling, monitoring their adherence, decreasing 
overutilization, and making certain that they know how to use 
the products properly.
    My pharmacies, like all community pharmacies, play an 
essential role in providing and improving healthcare outcomes, 
while decreasing long-term healthcare costs. If community 
pharmacists are not exempt from the competitive bidding 
program--and I repeat, if community pharmacies are not exempt 
from the competitive bidding program--and are forced to undergo 
drastic cuts in reimbursement for DME, many of these pharmacies 
like myself will have no choice but to stop providing these 
services to patients. Whether these drastic cuts are seen from 
subjecting all retail pharmacies to competitive bidding or 
competitive bidding pricing for diabetic testing supplies by 
2016 by CMS' inherent reasonableness authority, community 
pharmacies cannot continue to provide access to these essential 
supplies while undergoing such drastic cuts.
    If I were to cease providing these services in the areas 
that my pharmacies serve, it is bad enough that the patients 
would have to go 5 to 10 miles to obtain their diabetic testing 
strips from a large chain pharmacy, but it could be--and this 
is so very important for everyone to realize--it could be over 
50 miles to obtain other DME supplies such as wheelchairs. And 
as I stated earlier, mail order is not a viable option for 
beneficiaries in these areas.
    This is not just an issue of convenience. This is about 
providing reasonable access to beneficiaries. If beneficiaries 
do not access their Part B supplies, this decreases adherence, 
decreases the quality of care beneficiaries receive, and drives 
up the overall healthcare costs.
    In order to preserve this access to care I would strongly 
urge all members of the subcommittee to follow the lead of 
Chairwoman Ellmers and cosponsor H.R. 1936, the Medicare Access 
to Diabetes Supply Act. H.R. 1936 has bipartisan support and 
was introduced by Representatives Schock and Welch. The bill 
would exempt small pharmacies from competitive bidding and 
preserve patient access to diabetes supplies. This legislation 
will protect patients, keep the importance of face-to-face 
interactions with their independent pharmacist for effective 
diabetes monitoring, and ensure that all beneficiaries have 
immediate access to the specific diabetic testing supplies that 
they need.
    My pharmacy is one of very few pharmacies still in the area 
that provides essential DME supplies to patients. To me, this 
is more than just a prescription. I provide DME supplies in 
order to make certain that beneficiaries have access to the 
supplies that they need. If I were to decide not to offer these 
DME supplies because the burden of offering such supplies has 
become too high and costs too much, then these beneficiaries 
would have nowhere else to turn to receive the face-to-face 
consultations and quality supplies that I provide to them and 
that they deserve.
    Thank you again for inviting me here today to speak, and I 
look forward to any questions that members of the subcommittee 
may have.
    Chairwoman Ellmers. Thank you.
    Chairwoman Ellmers. At this time we will start our 
questioning. Dr. Cramton, I will start with you. And, Mr. Mire, 
I think I mispronounced your name initially, so I apologize, 
and I will try not to do that again.
    Dr. Cramton, in your expert opinion, what are the 
fundamental issues you see with the competitive bidding program 
as it pertains to the--and I am going to just say it, and you 
can correct me if I am wrong--the DMEPOS. Is that correct?
    Mr. Cramton. Correct.
    Chairwoman Ellmers. Okay--as established by CMS, and do 
other experts agree with you?
    Mr. Cramton. Well, let us look at the basic principles of 
an auction. The basic principles of a government auction like 
this are efficiency, transparency, simplicity, and fairness. 
The CMS auction gets a letter grade of F on each dimension. 
This is not good. And, in fact, all experts agree with me, and, 
in fact, that was the point of the letters from originally 167 
and then 244, including 4 Nobel laureates.
    So there is unanimous consent on this, and, in fact, I have 
been working on this for 2 years. I have talked to people 
around the world, and, indeed, I have never heard anybody 
disagree with the remarks that I presented today and that are 
presented in my written testimony before you.
    So the two biggest problems are the nonbinding bids and the 
median pricing rule. Those combine to create a perfect storm 
effectively. When thinking about how to bid in the auction, I 
often advise bidders in high-stake auctions in various 
industries, and so I often will think like a bidder. And I am 
asked to figure out what a good strategy would be in this 
auction.
    Well, in this auction the first thing to note is you don't 
have to think about your costs at all when submitting bids. The 
bid is simply you are able to get an option to say yea or nay 
to the price that is offered subsequent to the bid. There is 
very little chance that your bid is going to impact the price, 
and so your incentive is to bid the smallest number that you 
can get away with. So this is why the first go-round in 
November 2008, the original round one, Congress had to step in 
days after the auction and cancel the auction because the bids 
were crazy.
    So, the response to that was to introduce this concept of 
the bona fide bid, which is effectively a floor on how low you 
can bid. It is quite clear to any expert and, I suspect, 
anybody here that when you are doing a procurement auction, and 
the idea is to get the lowest competitive price, if the auction 
needs to have a floor, that is sort of strange. In fact, it is 
very common for procurement auctions to have ceilings in order 
to protect in the event of insufficient competition. But floors 
are exceptionally unusual, and it is an artifact of this 
extremely poor design.
    In the words of Mr. Wilson, he said, quote, ``This is not 
an auction.'' This is one thing I completely agree with Mr. 
Wilson about, it is not an auction, and that is a very damning 
critique for the following reason: In 2003, Congress passed 
legislation that required that CMS conduct a competitive 
bidding program for durable medical equipment. Competitive bids 
and auction are the exact same thing. So he is saying that CMS 
is not abiding by the law, and I would agree with him on that 
point.
    Chairwoman Ellmers. Thank you, Dr. Cramton.
    Ms. Zelenko, what do you consider to be--and you were very 
detailed in your testimony as well, so I am basically going to 
be asking you to reiterate--but what would you consider to be 
the most troubling problems with the current competitive 
bidding program?
    Ms. Zelenko. It is the nonbinding bids. It is absolutely to 
allow providers to come in and bid the lowest that they can bid 
without being responsible for that bid or that care is probably 
the most damaging of the program.
    The lack of transparency of the winning bids is another 
area. We have asked for transparency to find out how they 
determined the bid, and the median price is--and not allowing 
that price to increase when providers chose not to take the 
contracts. I was a provider that chose not to take a walker 
contract, so I was in that 8 percent, and I can tell you the 
reason why is because the price was too low. I could not 
provide that service at that price.
    Chairwoman Ellmers. And just briefly, it sounded to me from 
your testimony that you are in favor of the market pricing 
plan. Is that----
    Ms. Zelenko. It eliminates the problems that we have 
discussed with the current bidding program.
    Chairwoman Ellmers. And so something, a solution like that 
would be something you would support?
    Ms. Zelenko. Yes, it is.
    Chairwoman Ellmers. Okay. Mr. Mire, what impact has the DME 
competitive bidding been on your pharmacy as a business owner?
    Mr. Mire. Yes, ma'am. We service many patients, and I have 
patients that come in that are not just your diabetic patients, 
but if we were just to talk about a diabetic patient, sometimes 
they experience amputees, and they need wheelchairs, walkers, 
so forth, rollators to help with that situation. For us to have 
to tell them that they have to go 50 miles because someone won 
a bid 50 miles away, it is just not practical for them, and 
they are not going to be compliant. They do not get the 
training on the equipment if they were to find a family member 
or someone that could bring them there. Transportation is a 
major issue.
    So there are a lot of problems that the patients are 
experiencing. Accessibility would be a major one; adherence, 
and being compliant to know how to use the equipment, because 
they are not going to be able to go 50 miles away coming from a 
rural area to get the proper training and everything as 
discussed, and a lot of times they just give up on it. They may 
decide to just stay bedridden and so forth, and they begin to 
get more issues, bedsores, etc. And they miss that one-on-one 
counseling that a healthcare professional can give them, as 
opposed to just a delivery driver or someone showing up 50 
miles away, if they do have delivery services, to bring them 
this equipment.
    Chairwoman Ellmers. You bring up an excellent point. As a 
nurse, I know. These are patients who have multiple problems, 
and when we are being so shortsighted on how they are able to 
obtain the equipment that they need, you know, we are not 
considering that, and I think that is one of the big flaws. So 
thank you.
    At this time I would like to yield to Mr. Richmond for any 
of his questions.
    Mr. Richmond. I will start with Mr. Mire. You basically 
answered the first one, which is the award to companies with no 
connection or location in close proximity to the community, and 
the effect it has especially on our large diabetic population 
in New Orleans. Let me ask you this one: According to Mr. 
Wilson, in response to complaints from suppliers having 
difficulty navigating the process, CMS launched a new bidder 
education program. Since you are going through it now, have you 
had any interaction with that program? Is it helpful?
    Mr. Mire. Actually, sir, there was no one to even point out 
the program. Nobody from CMS ever contacted us. I speak for 
many pharmacies that participate in this. There was no 
knowledge or education of the program that was even out there 
for people to maybe come together and bid as a group, or even 
an educational program that would help you just as an 
individual pharmacy. There was no knowledge that any of us were 
privy to until I found that out today.
    Mr. Richmond. And, Ms. Zelenko, your first round did not go 
as you would want it and as we would want it. If you had that 
program or access to that education program, do you think it 
would have helped?
    Ms. Zelenko. Well, actually, I won the oxygen bid in the 
round one, and it was at a price that I felt that was 
sustainable. Unfortunately, when we had to go through round 
1.2, I did not win.
    The education comes from our national and State 
associations, and not through the government. So we had many 
opportunities to learn, but it was not through the government, 
and when we did have the government, they weren't able to 
answer our questions and asked us to submit them, and they 
would get back to us. So all of the education that we had was 
through our own industry.
    Mr. Richmond. Professor--Dr. Cramton, not about the market 
approach, this is something that just strikes me kind of out 
there, and I would be interested in your economic assessment of 
it. The competitive bidding program does not allow for 
adjustment of bids for economic factors. And I believe that you 
are locked in for 3 years, and considering the volatility of 
energy costs, gas prices, you name it, how could you create an 
adjustment structure without completely reopening bids, or can 
you do that?
    Mr. Cramton. Well, the way to do it is to have a proper 
auction, and, in fact, the reason that we are having an auction 
is because CMS doesn't know what the right price is. They want 
to identify the least cost-competitive, sustainable price, and 
an efficient auction does exactly that. And so the MPP actually 
occurs every year and uses simple econometric models to 
establish the price in those--on those products or regions that 
are not competitively bid that year. But all products and 
regions are competitively bid over time, so it is much more 
fluid pricing that is consistent with the dynamics that we see 
in our economy.
    Mr. Richmond. And I guess this question could be either for 
Ms. Zelenko or Dr. Cramton. When price becomes the primary 
factor for determining a Medicare contract, suppliers must feel 
tremendous pressure to eliminate high-quality products. Is that 
pressure real, or do you see it in terms of the quality of 
care, the quality of the products that are out there?
    Mr. Cramton. If I may, this is a very common problem in the 
procurement setting, and this is a procurement setting. The 
government is procuring on the behalf of beneficiaries durable 
medical equipment. The problem is called ``the race to the 
bottom.'' And if the auction is not well designed, that is, if 
there is not proper qualification, proper deposits, proper bid 
bonds, proper performance bonds, there will certainly be a race 
to the bottom. This is observed again and again in government 
procurements throughout the world.
    The way it is avoided is with a properly designed auction 
that elicits the competitive price. That is done by eliciting 
the true costs from the providers. The current system does not 
elicit the true costs from the providers. Mr. Wilson stated 
that in his response, and I quote, ``The winners rejected or 
accepted not based on their bid.''
    That is, the consideration was just what Ms. Zelenko said. 
The consideration in accepting or rejecting was whether she 
thought she could provide the goods and services at the price. 
Okay? So it has nothing to do with her bid. And in a 
competitive, efficient auction, the trick of making an 
efficient auction is to elicit the bidder's true costs, and 
then, in fact, the acceptance or rejection would be based upon 
the bid. And that is exactly what an efficient auction does 
when it identifies the clearing price. Those that bid below the 
clearing price are accepted; those that bid above are rejected.
    Ms. Zelenko. And I think it is important that we understand 
when we talk about true costs, it is not the cost of the 
equipment. The cost of the equipment is a fraction of what our 
costs are. Our costs are in the service sector of what the 
services we provide. It is the education for our staff. It is 
the respiratory therapist, and hundreds and hundreds and 
hundreds of hours of teaching and training to go out to that 
beneficiary's home. We have all of the regulatory agencies that 
we need to adhere to, joint commission accreditation.
    These are all costs, and every day we are faced with those 
costs. And not to mention, we cannot pass on any of those 
costs. We absorb every single one of those costs. When we look 
at the fuel--I mean, I still have to give raises to my staff or 
I can't keep my staff. I have to be able to compete in my own 
marketplace.
    So the misconception that our costs--that we are paid too 
much because of what the equipment costs is a misconception. It 
is not about our equipment. We are a service industry.
    Mr. Richmond. Thank you, and I yield back.
    Chairwoman Ellmers. Thank you for those responses.
    And now I will turn to my colleague Mr. King for his 
questions.
    Mr. King. Thank you, Madam Chair, and I thank the 
witnesses.
    First, Ms. Zelenko, I would ask you if you could take us 
through the walker bid, I think you referred to it as. And a 
series of questions come to mind for me and the narrative I 
think could be helpful. How many bidders were there? Where did 
you fit in that rank order? How did it turn out that you were 
the successful bidder, but on 2.1, I think you said, you were--
you had to turn it down because they offered you something 
below your costs. Could you explain how that went; just go 
through that process so that I can fit in my mind's eye.
    Ms. Zelenko. Well, initially we went into round one, and 
obviously I put in an enormous amount of time, my staff put in 
an enormous amount of time to really look at what our true 
costs are. We based it off of activity-based costing, which 
is--you know, pulls in all of your costs from intake to 
delivery, to assessment, and determined the price that I felt 
that I could continue to provide quality services. And I am a 
for-profit. The risk is there. It is all here on my shoulders 
to make sure that I can take care of payroll and everything 
else that comes along with that. So it was a very informed and 
realistic price.
    When round two came out, or----
    Mr. King. Where did you fit in the rank order? How many 
bidders and generally how big of dollars are we talking about?
    Ms. Zelenko. I will need to get back to you on that, and I 
can put it in writing.
    Mr. King. The number of bidders, don't you have a kind of 
range so we have got a concept to work with today?
    Mr. Cramton. No data. The data is not available.
    Ms. Zelenko. That is part of it.
    Mr. King. That is part of the problem? You don't know who 
you are bidding against, but you were successful because they 
selected you as the median bidder, but you don't know the 
median of what the range were?
    Ms. Zelenko. Correct.
    Mr. King. You don't know how many suicide bids were out 
there. He says that there aren't suicide bids, but the data 
shows there are at least 8 percent that are, and it could be a 
lot more than that. And I don't know that I would qualify you, 
under this scenario, as a suicide bidder under this scenario 
that we are talking about. That is people at the bottom that 
puts you in the median.
    Ms. Zelenko. Correct.
    Mr. King. And so for me it is a bizarre bidding process to 
have no transparency.
    What about qualified bidders? Do they only accept bids from 
qualified bidders? You said your accreditation is a piece of 
this. Is that a component as well?
    Ms. Zelenko. Yes, it is.
    Mr. King. You have to be qualified.
    Ms. Zelenko. You do have to be qualified.
    Mr. King. This is, to me, and I am trying--I can't get into 
this world, but I would like to go to Dr. Cramton in the time 
that clock that is now moving against me. Do you believe that 
CMS has the statutory authority to require a bonding process 
for bid bonds and performance bonds?
    Mr. Cramton. Absolutely. The government and pretty much 
across the board in all of the proper auctions that I am aware 
of in government, not just the United States, you know, the 
individual States, around the world, all have protections with 
respect to bid bonds or deposits. In the case--in the case of 
an auction actually rather than a bid bond, a preferable 
instrument is a deposit. And that is because a deposit can be 
used because performance with respect to a bid is easy. You 
either sign the contract at the end of the auction or not. That 
is the performance. Then there is performance after you sign 
the contract, and that might be a little bit gray. But 
performance with respect to an auction is black and white, and 
so----
    Mr. King. Were you astonished to hear Director Wilson 
testify that they didn't have the statutory authority to 
require bonding?
    Mr. Cramton. I was astonished, absolutely astonished. When 
I talked with him, he did say that I did talk to them, and when 
I marched in and talked to CMS the first time, they told me the 
reason that they can't have binding bids is because they can't 
have contracts. And that is nonsensical to me. After all, they 
sign a supply contract. You are a contract supplier. They even 
use the word, and, in fact, you do sign something.
    Ms. Zelenko. You do.
    Mr. Cramton. So they said, well, it can't be--it has to be 
voluntary. An auction by its nature is voluntary. Nobody is 
forced to bid, and, in fact, you get to bid what you like. And 
especially in a proper auction you are not constrained by a 
floor and a ceiling.
    Mr. King. What about the grandfather clause? I would ask 
Ms. Zelenko. What happens with companies that are grandfathered 
in? Do you see that being in effect 10 years from now, these 
companies that are grandfathered in, or how does that affect 
the way you do your business?
    Ms. Zelenko. Well, I chose to grandfather in, and one was 
because I was hoping that we would be able to eliminate the 
current program or repeal and replace it. So I kept my patients 
that I have had. It is hard to say what is going to happen, 
because the players are changing probably as we speak. And, you 
know, the small providers that were part of that initial round 
one are no longer going to be here.
    Mr. King. Well, thank you.
    Here is my concluding observation, and that is having 
started up a business from scratch, dealing with large 
institutionalized companies, I know that they have an ability 
to sit down with the people who write the specifications for 
the bidding process, and if you are a little old company trying 
to get a toehold, and there are big companies in there that are 
at the table negotiating how this bidding process goes, that 
gives a tremendous advantage to the people that write the 
specs.
    And I don't know who Director Wilson is meeting with from 
the independent companies out there, but the pattern of this is 
a pattern that I have seen for my entire business life, which 
spans about 38 years now. And that pattern is big companies are 
at the table writing the specifications for the bidding 
process--as bizarre as this is, I would suspect that they had a 
voice in this--and small companies are on the outside trying to 
figure out how to compete while they are playing in a set of 
rules that are written to keep their competition out.
    And so I appreciate your testimony. I am completely 
convinced there is a lot more in all of this document that we 
didn't get to hear today, and I hope the other panelists are 
able to review this and our staff is, and we can come with a 
real solution to this.
    Thank you, Madam Chair and the witnesses, and I yield back.
    Chairwoman Ellmers. Thank you.
    And now, Mr. Thompson, did you have any questions?
    Mr. Thompson. Sure. Thanks, Madam Chair.
    Ms. Zelenko, you talk about true costs. I was curious. Is 
there--among those true costs is there a cost for you in terms 
of the cost of compliance with--specifically with Medicare 
regulations? Is that a part of your cost of doing business?
    Ms. Zelenko. Oh, absolutely. It is an enormous amount.
    Mr. Thompson. Well, any idea of a percentage?
    Ms. Zelenko. Well, offhand I can't give that to you, but I 
can----
    Mr. Thompson. It is significant.
    Ms. Zelenko. It is significant. The price of the equipment 
is probably 12 percent of what we do. So that is a very small 
component of our costs. The costs really come down into the 
intake, getting prescriptions to and from the physician, and 
then managing that patient. We are managing their care.
    Mr. Thompson. Right. These gas prices probably don't help 
your business at all either.
    Ms. Zelenko. And we cannot pass on any of this.
    Mr. Thompson. Yeah.
    Dr. Cramton, I don't know if you are familiar with H.R. 
1041. It is a bill I have been proud to be a sponsor of, 
Fairness in Medicare Billing Act. There is 172 cosponsors, so 
there is a strong recognition in Congress that competitive 
bidding is flawed.
    Now, it is a start to repeal competitive bidding. I think 
working with the industry, there has kind of been a middle 
ground that has been identified that is the Market Pricing 
Program. Can you explain how the Market Pricing Program would 
improve the bidding process and, frankly, the allocation of DME 
to Medicare beneficiaries?
    Mr. Cramton. Certainly. Well, let me just go back to the 
four principles that I mentioned earlier: efficiency, 
transparency, simplicity and fairness. With respect to 
efficiency, what the Market Pricing Program is doing is using a 
very well-established auction procedure that has performed 
extremely well in theory, in the lab, and in the field for many 
decades, and some elements of it for actually thousands of 
years. It is really the fundamental market clearing price where 
supply and demand balance.
    With respect to transparency, the Market Pricing Program is 
extremely highly transparent. It is quite responsive, so that 
rather than taking the bids and then waiting 1 year before 
announcing what the prices are and who the winners are, in 
fact, the prices and winners can be identified in less than 1 
second. So a dramatic improvement.
    Also with respect to transparency, the data would be 
available, and this is very important, and the data would not 
just be available to the public, but it would be available to 
the Independent Market Monitor. This is an extremely important 
innovation that began actually after the California electricity 
crisis in 2000-2001. Now every electricity market in the United 
States has an Independent Market Monitor. The market monitor 
has access to all of the data. They are watching the market. 
They write a detailed annual report about how the market is 
doing, what can be improved, proposals. When they see a 
problem, they immediately jump on the problem and address the 
problem. So this is an important element of transparency and 
also in fine-tuning the process.
    If one takes a look at the 1-year report that CMS did, 
which I think was released on April 17th of 2012--it is on my 
Website, it is on their Website--you will see a 16-page report 
that does not address any of the issues that all of the experts 
agree are extremely serious problems with their program. Not 
one word about any of the issues. So it is not a critique, it 
doesn't give data, it just makes and assertion.
    In contrast, in my written testimony I give a link for the 
independent market monitoring report of PJM, which is our 
electricity market here, and you will see that there is just 
a--this is a small business. The Independent Market Monitor, it 
is a company of 25 full-time employees, an incredibly 
sophisticated and detailed analysis of the market, the process, 
everything. It just is night and day.
    Mr. Thompson. Director Wilson had talked about that it 
would take 8 years to implement this. Now, I understand from 
your testimony you implemented a--and I recognize it was a 
pilot, a mock auction through the University of Maryland, so I 
have to wonder if the 8 years, is that the speed of CMS, or----
    Mr. Cramton. Yes.
    Mr. Thompson. Is it denial with all of the--you know, in 
public policy we--frequently in debate we get wrapped into 
emotion, you know, a lot of emotion. But, you know, I love the 
fact that there is a lot of science that you have brought to 
this issue, and a lot--over 260 colleagues who have weighed in 
on this.
    How long do you think, in your opinion, would it take to 
really implement an MPP?
    Mr. Cramton. Well, the longest lead time is with respect to 
the regulatory process, but it could be streamlined and 
accomplished by congressional instruction in 8 to 12 months. 
And I say that with a great deal of experience. So not 8 years; 
8 months. That is what we are talking about if it is done 
properly, if the experts are engaged.
    With respect to, for example, the system that performs the 
auction, this can be procured through competitive bid by 
government, as the Federal Government does. So, for example, 
the FCC routinely involves experts in their design, which has 
been incredibly successful, so successful that this is their 
design for spectrum auctions. It has been implemented 
throughout the world.
    So I think that there is no question that if it is mandated 
by Congress, and Congress does give CMS detailed instructions 
on what to do and the timetable for doing it, that, in fact, 
this can be done in--8 to 12 months would be--that would be the 
fastest, I would say. But certainly the--yeah, 8 years is just 
crazy.
    I would like to say one other thing that was raised, and 
that is who this harms or helps. It has been suggested that 
this harms small businesses. That is absolutely true. This 
existing program obliterates, will obliterate thousands of 
small businesses. It already obliterated about 4,000 in the 
round one rebid. But it is also the case that this is very bad 
for big businesses and medium-size businesses. This is bad for 
all businesses. It is not the case that there is some special 
interest of providers that has been lobbying and rigging the 
rules in a particular way. In fact, I don't know of any 
providers, any providers, small, medium, large, who like the 
existing rules. They are just crazy.
    Mr. Thompson. Thank you.
    Chairwoman Ellmers. Thank you, and thank you so much for 
our panel and your testimony and your answers to our questions. 
It is helping us to get a better grasp of the situation and 
what we need to do to rectify it.
    So at the beginning of this hearing, I said that we were 
here to assess the impact of the Medicare Durable Medical 
Equipment Competitive Bidding Program. Our intent was to 
understand the program's impact on patients, small business 
suppliers, and the implications for the program expansion. At 
this point I would say we have gotten great insight into how 
the program operates and some of the struggles it is going 
through, some of which are very troubling.
    Certainly all of us can agree that lower prices means the 
patients are paying less for the DME products and services they 
must have. These lower prices are something all of us can 
celebrate; however, how those prices are obtained and the 
methods by which the small business suppliers are allowed to 
participate and compete fairly are critical to this program. 
This hearing began the process, but, going forward, we must 
seek to ensure that this program protects patient access to the 
vital products and care that they need. While I strongly 
believe in the competitive forces of the private market, the 
process by which the competition is conducted must be fair and 
truly competitive.
    I want to thank each of you for your testimony today and 
helping the Subcommittee understand the successes and 
challenges associated with the round one system, and hope that 
we have shed light on a number of things that should be changed 
before the program's scheduled expansion next year.
    I ask unanimous consent that Members have 5 legislative 
days to submit statements and supporting materials for the 
record. Without objection, so ordered.
    [The information follows:]
    Chairwoman Ellmers. This hearing is now adjourned.
    [Whereupon, at 11:54 a.m., the Subcommittee was adjourned.]
    


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