1. Repeal and Reform Legislation for Medicare DME Auction Program Peter Cramton Professor of Economics, University of Maryland Chairman, Market Design Inc. www.cramton.umd.edu 3 June 2011 Details at www.cramton.umd.edu/papers/health-carewww.cramton.umd.edu/papers/health-care 1

2. Next steps Draft legislation for efficient Medicare auctions Educate stakeholders on benefits of an efficient auction – April 1, Medicare auction conference – May 24, Hill briefing on Medicare auctions – Additional briefings to be determined CBO score of an efficient auction legislation Pass bipartisan legislation on repeal and replacement with an efficient auction Development and implementation, 2011-2012 – 1/3 of country, 1 January 2013 – 2/3 of country, 1 January 2014 – All of country, 1 January 2015 2

3. Statutory language: Motivation CMS has demonstrated since 1997 that it requires explicit guidance on competitive bidding Current CMS approach gets an failing grade on – Transparency – Efficiency – Protections to assure success 3

4. Statutory language: Objectives Transparency Efficiency: least-cost sustainable competitive prices Protections to assure quality goods and services and avoid race-to-bottom Protections to assure best available science and practice 4

5. Statutory language: Transparency Unless explicitly and narrowly justified to limit potential collusive behavior among bidders, all elements of the market from qualification, to bidding, to award, to performance will be publically disclosed Modern methods will be developed to promote the immediate disclosure of essential market elements in simple and powerful data bases 5

6. Statutory language: Efficiency Auction design based on long-run efficiency objective – Least-cost sustainable competitive prices – Market clearing price for each product-region – Products optimized consistent with efficient market Products regularly reviewed for benefit/cost performance Products reviewed regularly, especially in response to innovation Benefits based on latest clinical evaluation, including – both patient well-begin and healthcare cost-reduction – clinicians who have experience and expertise with each product category – Auction design established in collaborate consultation with industry and other stakeholders, but led with critical input from auction design experts with substantial experience in a diversity of auction design settings 6

7. Statutory language: Protections for participants To avoid a race-to-the-bottom, protections are provided for efficient Medicare providers and Medicare beneficiaries Qualification – Rigorous qualification to bid – Letter of credit or deposit proportional to expected volume as a bid guarantee Performance – Clear obligation of performance by winners – Letter of credit or deposit proportional to expected volume as a performance guarantee Beneficiary choice – To the extent consistent with an efficient auction, beneficiary choice is maintained and encouraged Market structure – To assure long-run competition in the market to supply, No supplier in any product-region can win a capacity greater than 20% Small businesses with historical total volumes less than $10 million shall provide at least 20% of capacity of each product-region 7

8. Statutory language: Protections for best practice DME competitive bidding program must be designed consistent with the best science and practice – Expert auction design services procured via competitive bid DME competitive bidding program must be implemented consistent with best science and practice – Expert auction implementation services procured via competitive bid Independent market monitor – An independent expert (individual or panel of three) shall be retained with two-year terms by the Secretary of Health and Human Services – Independent market monitor is not a current government employee; independent market monitor is not a current or former CMS employee over the prior twenty years – Independent market monitor reports directly to the Secretary of Health and Human Services (not CMS) – Independent market monitor has available all confidential information on the market – Independent market monitor reports on a regularly basis (annual report and four quarterly reports) on the state of the market Identifies potential problems Makes recommendations on addressing potential problems – Independent market monitor is not a judge and does not make rulings 8