Fixing the Fatally Flawed Medicare Auction
Brett Katzman
In papers published in the Southern Economic Journal, the Economists’ Voice, and Economic Inquiry, Dr. Brett Katzman and coauthors describe fatal flaws in the Medicare auction used to set reimbursement prices in the multi-billion dollar Durable Medical Equipment industry that supplies seniors with home care devices. These papers rigorously use mathematical modeling and game theory to show how Medicare’s experimental pricing rules encourage bidders to game the system, leading to economically inefficient results and sometimes, complete market failure. This is troubling since home care medical supply industry shortages lead to more costly hospital stays, thus defeating any savings the auction may generate. However, these papers also establish that the problems are easily fixed by switching to the well-established and time-tested clearing-price auction, an idea adopted by Dr. Tom Price (Rep. GA) when introducing House Bill HR 4185, the Protecting Access through Competitive-pricing Transition (PACT) Act, in December 2015. HR 4185 has roots in Dr. Katzman’s Economic Inquiry paper (with Peter Cramton and Sean Ellermeyer), “Designed to Fail: The Medicare Auction for Durable Medical Equipment,” and calls for abandoning the current auction and replacing it with the Market Pricing Program, an industry-specific variant of the clearing price auction. Overview
14 | Business Engagement
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