Crazy Bidding Scheme

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.

Entire Wall Street Journal editorial worth reading.

Comments (6)

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  1. Devon Herrick says:

    I’m a firm believer in selective contracting and competitive bidding in Medicare. The problem is: every time Medicare tries to inject competition into the system, special interest lobbyists for scammers and the price gougers all descend on Washington and complain to Members of Congress that their constituents’ Gravy Train is about to be derailed. Purveyors of over-priced (or fraudulent) durable medical equipment view scamming Medicare as an entitlement.

  2. Brian says:

    I wonder who else, of any departments in government, has used this unusual version of competitive bidding.

  3. Greg says:

    Good editorial.

  4. John R. Graham says:

    It is a really appalling system.

    However, recommendations for reform have neglected to include the simplest alternative. Instead of trying to design an auction system that saves money for Medicare, the Centers for Medicare and Medicare Services (CMS) could announce the price that is paid for durable medical equipment (DME) and split the savings with Medicare beneficiaries.

    If the Medicare beneficiary can acquire the DME at a lower price, a bonus gets added to his Social Security.

    Of course, it would have to be a little more complicated than I’m describing, because we would not want beneficiaries to buy DME that was so cheap that it was poor quality and let to higher costs of hospitalization, etc.

  5. Neil H. says:

    This is crazy

  6. Jim Fiss says:

    I have worked in the medical industry for over 30 years and government funding for health care has continued to get worse. The current Medicare bidding is beyond poor.
    *Those who do not have a location in the bid area can bid, if they win the bid, they will open up for business and push more small companies out.
    *Non-governemnt studies have found that end users are getting poor service.
    *There are numerous items that we must bid on, that Medicare will no longer pay for. Do they have a clue of what they are doing?
    *Medicare has admitted, in writing, that they want the amount of dealers to decrease 50-75%. Interesting that politicians praise small business, but rarely do anything for them worht any value.
    The list can go on and on, but it is a poorly thought out plan.