CMS’ Noncompetitive Bidding Process

Last Friday, CMS announced that it will be expanding its durable medical equipment bidding pilot program nationwide. Although the term “competitive bidding” might make you think that this is a good program, the reality is much different. Benjamin Zycher explains it best:

The experimental literature on the CMS auction design is unambiguous: it yields prices too low. This outcome results from the design features: bids are not treated as binding commitments, the contract price is the median among the winning bids rather than the bid reflecting marginal cost, the composite bid system of averaging over heterogeneous products skews bids in ways driven by perceived errors in demand projections, and the allocation of market shares is opaque. These problems yield prices about one-third to two-thirds below the competitive price.

What does all of this mean? Expect to see more medical device suppliers go out of business and increasing medical supply scarcity. This will increase Medicare costs as seniors go back to the hospital due to complications from lack of supplies.

What started as a program to save money for Medicare is now going to drive up costs, and it’s all because CMS doesn’t understand how a real competitive bid is supposed to work. If you’re feeling especially brave, try reading through the competitive bidding regulations. A real competitive bidding process doesn’t need 100 pages of guidelines.

Comments (3)

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  1. Virginia says:

    There has been so much research done into competitive bidding and competitive markets. Why doesn’t the CMS use an existing model and make the process less complicated?

  2. Neil H. says:

    Good post. Thanks for covering this material.

  3. Buster says:

    Google, Amazon, eBay and a host of other organizations hire economists to model auctions using game theory. CMS, on the other hand, designs an bidding process that accomplishes even less than a simple auction would have done.