Will Competitive Bidding Decrease Medicare Prices?

Abstract

Recent measures to reduce Medicare spending include the use of competitive bidding in determining reimbursement prices. Several competitive bidding experiments have been conducted by the Centers for Medicare and Medicaid Services (CMS) to determine reimbursement prices. This paper investigates the use of competitive bidding to set reimbursement prices for durable medical equipment, prosthetics, orthotics, and supplies. First, the competitive bidding process is examined on a theoretical level. It is shown that the CMS competitive bidding process (auction) is inefficient, leads to price increases, and may cause decreases in the quality of services. Next, data supporting the theoretical predictions are presented. Finally, we suggest that a descending variant of the Ausubel, Cramton, and Milgrom (2006) clock‐proxy auction be used.