Study: Bidding design has 'potential for disaster'

Tuesday, June 5, 2012

PASADENA, Calif. – Medicare's competitive bidding "fails to generate competitive prices…and fails to satisfy demand," says a new study from Caltech.

The study, published in the May issue of The Quarterly Journal of Economics, was done by Charles Plott, a professor of political science and economics at Caltech, and students Brian Murlob and Yuanjun Zhang. The study makes the case that the auction structure, as it currently stands, doesn't work for two key reasons: The selling price is set at the median of all winning bids; and the bids are non-binding, according to a story in Pasadena Now, a local newsmagazine.

Pasadena Now also reported: The median price will also be very low—so low, in fact, that few of the companies can actually afford it, leading them to cancel their offers. At the extreme, nothing is bought or sold and, Plott says, “the auction crashes. It’s just not an effective auction.”

And what will happen then, critics warn, is that the government will end up negotiating prices with individual companies—negating the whole point of a competitive-bidding scheme in the first place, according to Pasadena Now.

“You can see immediately from theoretical arguments that the potential for disaster is built right in the strategic structures," Plott says.

The study supports what the industry and others, including auction design experts, have said all along: The design of the CMS program encourages low-ball bids.