Medicare auction update: It still needs to be fixed!

On 1 April 2011, 110 stakeholders in the Medicare Durable Medical Equipment (DME) industry came to the University of Maryland to discuss how the CMS’ current competitive bidding program could be improved. The participants included Medicare providers, government leaders, and auction experts. A major part of the event was the conduct of a mock auction based on the auction design proposed in Cramton (2011a). This design addresses the fatal flaws in the CMS design (Letter from experts, 2010). The proposed design has been shown to be highly effective in theory (Cramton et al. 2011), in the experimental lab (Merlob et al. 2010), and in practice (Ausubel and Cramton 2004, 2006).

The materials below present the conference discussion as well as the mock auction results.

There were many highlights in the event. Here are a few:

  • Peter Cramton describing the process of effective market design, using the best available science, as dictated by President Obama’s Executive Order on Regulation (18 January 2011).
  • Tom Bradley, Chief, Medicare Cost Estimates, Congressional Budget Office, explaining that the current CMS auction results in arbitrary prices unrelated to the market clearing price and that the current program would fail with near certainty if not reformed.
  • Nancy Johnson, 24-year Congresswoman (R-CT), Senior Public Policy Advisor, Baker Donelson, speaking beautifully about the importance of fixing the Medicare competitive bidding program through an effective collaboration among industry, government, and auction experts.
  • Evan Kwerel, Senior Economic Advisor, Federal Communications Commission, pointing out that many of the reasons given by those opposing auctions for why auctions can’t work apply equally well to the alternative of administrative pricing. At the very least, those who oppose auctions need to suggest an alternative that can be compared with the approach of fixing the current auctions.
  • Nancy Lutz, Program Director, Economics, National Science Foundation, stating that if the auction design does not work in theory, it won’t work in practice, and that if the auction design does not work in the experimental lab, it won’t work in practice. These insights are established in countless scientific studies. (The papers cited above show that the CMS design fails in theory and fails in the experimental lab.)

Most importantly, the mock auction demonstrated the feasibility of the proposal as well as its excellent performance. Despite the complex bidding environment, the mock auction achieved extremely high levels of economic efficiency. Moreover, the participants were able to understand the auction format and auction platform, and successfully execute bidding strategies for 6 products in 9 regions, all in a matter of hours. The conference also demonstrated the advantages of advancing the Medicare auctions through a collaboration among industry, government, and auction experts. To avoid program failure, the Medicare auctions must be reformed to take advantage of modern auction methods.

All these materials are available at http://www.cramton.umd.edu/papers/health-care/.

The materials now include:

Medicare Auction ConferenceInn & Conference Center, University of Maryland, 1 April 2011.

I will post the full video of the presentations and other panels in the next several days as soon as they become available.

Thank you for your interest in this important issue.

Kind regards,

Peter Cramton

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