Will Competitive Bidding Decrease Medicare Expenditures?

Recent measures to reduce Medicare spending include the use of competitive bidding in determining reimbursement prices. Several competitive bidding experiments have recently been conducted by The Centers for Medicare and Medicaid Services (CMS) to determine reimbursement prices. This paper investigates the use of competitive bidding to specifically set reimbursement prices for Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS). First, the competitive bidding process is examined on a theoretical level. It is shown that the CMS competitive bidding process (auction) is inefficient, may actually lead to price increases, and may cause decreases in the quality of services. Next, data supporting the theoretical predictions is analyzed. Finally, we suggest switching to a Vickrey style auction that does not suffer from the problems of the current design.