Unbiased Analysis of Today's Healthcare Issues

Will competitive bidding work in Medicare?

Written By: Jason Shafrin - Feb• 09•12

In my opinion the answer is yes.  A book by Coulam, Feldman and Dowd also would agree with me.

Recently, Medicare began a competitive bidding process for durable medical equipment.  Is it working?  According to the Wall Street Journal, the answer is no.

Normally when the government wants to buy something, it asks companies how much they can provide and to name their price. Winners are selected from the lowest bid up until the government has what it needs at the lowest possible cost, and thereby finds competitive equilibrium prices.

Under Medicare’s highly unusual version of competitive bidding, it will pay the winners the median price of all the winning bids, rather than using the clearing price. Bids are also for some reason nonbinding.

This matters because it creates incentives for unscrupulous third-party companies to make low-ball “suicide bids.” If the median price shakes out high enough, they automatically win the contract, buy the medical products from manufacturers and turn a profit. If it isn’t, they can dump the contract since bidding involves no commitment.”

I still think competitive bidding in Medicare will work; the auctions just have to be set up in a more logical way.

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