Health Reform Built to Fail: How Medicare rigs competitive bidding and hurts patients (Wall Street Journal)

February 6, 2012

Editorial - February 6, 2012

Wall Street Journal

Health Reform Built to Fail: How Medicare rigs competitive bidding and hurts patients

"Americans may not be familiar with the medical innovation called negative pressure wound therapy, though it has helped hundreds of thousands of patients with complex or chronic injuries like burns or diabetic ulcer complications that could never heal on their own. Now President Obama's Medicare team is about to severely damage this field, and many others too—all in the name of reforming how the entitlement pays for care.

Last week a Medicare competitive-bidding program went live in 91 metro regions—nearly all the U.S. population—for what's known as durable medical equipment. That bureaucratic jargon covers advanced devices like wound therapy, respiratory assist equipment for people who can't breathe, and feeding tube systems for people who can't eat. It also lumps in things like walkers, scooters and "support surfaces." Those would be beds...

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…

The current nationwide rollout has no substantive revisions from the failed pilots, despite the objections of 244 economists and auction scientists led by the University of Maryland's Peter Cramton. The consensus of basically everyone who knows anything about auctions is that the no-risk bids and median pricing are idiotic and designed for failure…"

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