Have you ever heard of the “prisoner’s dilemma?” It’s a key element of game theory, and it has a lot to do why the Centers for Medicare and Medicaid’s national competitive bidding program is not only counter-productive, but destructive.
The prisoner’s dilemma is an example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interests to do so. It was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W. Tucker formalized the game with prison sentence rewards and gave it the name “prisoner’s dilemma” (Poundstone, 1992), presenting it as follows:
“Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of speaking to or exchanging messages with the other. The police admit they don’t have enough evidence to convict the pair on the principal charge. They plan to sentence both to a year in prison on a lesser charge. Simultaneously, the police offer each prisoner a Faustian bargain. If he testifies against his partner, he will go free while the partner will get three years in prison on the main charge. Oh, yes, there is a catch … If both prisoners testify against each other, both will be sentenced to two years in jail.”
Looking at the definition from Wikipedia (en.wikipedia.org/wiki/Prisoner’s_dilemma) we learn that in this classic version of the game, cooperation is dominated by betrayal; “if the other prisoner chooses to stay silent, then betraying them gives a better reward (no sentence instead of one year), and if the other prisoner chooses to betray then betraying them also gives a better reward (two years instead of three). Because betrayal always rewards more than cooperation,” the definition continues, “all purely rational self-interested prisoners would betray the other, and so the only possible outcome for two purely rational prisoners is for them both to betray each other. The interesting part of this result is that pursuing individual reward logically leads the prisoners to both betray, but they would get a better reward if they both cooperated.”
There are numerous variants on this theory including the “multiple player” version that shows how a large group can be subjected to the prisoner’s dilemma. Even though each has an interest in cooperating with each other, game theory predicts that most will defect, but few will receive the benefit of defection. For a much deeper, academic explanation, read the Stanford Encyclopedia of Philosophy’s entry on the Prisoner’s Dilemma (plato.stanford.edu/entries/prisoner-dilemma).
Enter Competitive Bidding
The competitive bidding process undertaken by CMS was originally touted to be an auction process. But what has resulted is an example of the prisoner’s dilemma carried out across the DME industry. Each DME (prisoner) was offered to provide a bid (a confession) and potentially gain some unprofitable business (light punishment) or risk losing a significant share of their business, which could potentially lead to them closing their doors (severe punishment). Even though it would have been in all DMEs interest to cooperate and provide bids of say 5 percent below the old fee schedule, each perceived their own self-interest to be served by low bidding. The incentive to provide a low bid is always greater than to either cooperate with their competitors or risk being driven out of business.
This analogy is not to suggest that the DMEs should have colluded; that would have been illegal price fixing. It is to point out that competitive bidding as it has been carries out is not an auction. I have read comments from CMS in response to DME cries of “foul” that boil down to “if the resulting bid rates are so unsustainably low, why did you bid them?” The reason is that the game was rigged by CMS to put each participant into the prisoner’s dilemma. And just like the game theory predicts, most participants chose not to cooperate (they bid low), but did not receive the benefit of defecting from the group (they did not receive bid contracts).
A real competitive bid auction would have included: a transparent release of bid information to all bidders, binding bids that awarded contracts only to qualified bidders, to all qualified low bidders, and required the bidder to accept the contract that they bid on. The fact that CMS has kept the bid information from the bidders during and since bids were submitted and made the bids non-binding has rendered the process into a game that operates on the lines of the prisoner’s dilemma.
Economists and government policy makers can argue whether this outcome was the intended effect from the beginning. The real issue is whether society is being served or harmed by the outcome of the competitive bidding program. The mission of the Medicare system is to provide healthcare for the elderly and disabled. The provision of this care in the home lowers cost of care, improves quality of life for the patients and improves clinical outcomes. Much of this home-based care is delivered by DMEs.
The U.S. DME industry will undergo a restructuring as a result of competitive bidding. There is a widespread belief among DMEs that the result will be a lower service level, restricted access for patients and a shifting of care for Medicare patients from the low-cost home environment to higher-cost venues like emergency rooms, rehab facilities and long-term care facilities.
The DME industry is one of the most vocal advocates for Medicare beneficiaries. At the same time, the DME industry has the most to lose through the implementation of competitive bidding. So, CMS policy makers view any objection to the competitive bidding program by the DME Industry as business self-interest. The application of the prisoner’s dilemma game to this self-interest, cloaked in the competitive bidding program, has achieved the dual purpose of lowering the cost of medical supplies while sidelining one of the clearest voices that could have objected to the negative impacts on patients. From a purely political perspective, you have to admire this slick trick.
This Isn’t a Game
If the changes resulting from competitive bidding were merely the debatable questions of cost savings or winners and losers in the DME industry, everyone with an interest in the Medicare system could take grim solace in knowing that the game was rigged from the beginning. But there are the medical issues of poorer outcomes for beneficiaries and the ethical question of impairing the system that allows elderly and disabled patients remain in their homes.
But at this point, these issues at the core of the Medicare mission have almost become moot. Unless there is congressional action to delay and eventually replace competitive bidding, then it will be foisted on 70 percent of the U.S. Medicare population. And since Congress seems unable to do anything, it is most likely that competitive bidding will go into effect on July 1. In several years, the results of this program will become apparent, but by then the damage will have been done.
As the effects of competitive bidding spread across the country over the coming months, keep in mind that the game was rigged through this prisoner’s dilemma.
