Auctions Versus Fixed Prices: Lessons from a Procurement Pilot

Abstract

Abstract Objectives Private health care providers are often acquired through procurement auctions to produce publicly financed services. In this study, we examine the costs and benefits of auctions compared to fixed price procurements. We analyze a procurement pilot that was conducted by Kela, the largest rehabilitation organizer in Finland. Kela piloted fixed prices instead of an auction in two different services in 2020. Data and methods Our data includes all procurements both for inpatient and outpatient rehabilitation courses by Kela in years 2012-22. The data includes 455 procurement auctions, which received 2584 bids, and 4 pilot procurements of fixed prices, which received 166 bids. Altogether 10 providers were contracted in the pilot procurements of the first service whereas the last two pilot procurements attracted 153 providers. Our preliminary results are based on simple statistical and graphical analysis regarding bid prices and their dispersion. Results Our preliminary main finding is that competition, calculated as number of bids per auction, is correlated with prices in the procurements. The main challenge of fixed prices is to determine the appropriate price-level. We find that the prices were set to be attractive in the pilots, as all providers who previously participated in auctions accepted the price, and several new providers entered the market in the pilot procurements of the second service. Conclusions Efficiently organized public procurements can yield large fiscal saving for the public economy. The procurements give information about the number of providers offering the service and their price. Fixed pricing eliminates the competitive setting, which means that the price is often set too high to ensure the availability of services. Key messages • Efficiently organized public procurements can yield large fiscal saving for the public economy. • Fixed pricing eliminates the competitive setting, which means that the price is often set too high to ensure the availability of services.