What market design can do for you

Michael Giberson

Medicare pays medical equipment suppliers based on indexed-adjustments to a price list established 25 years ago. It is extremely unlikely that these prices are efficient. For the past 10 years Medicare has explored the possibility of pricing medical equipment via procurement auctions. Their procurement auction plan is fatally flawed.

What can market design do for you? Market design – that branch of economics that seeks to apply economic understanding to the task of creating or repairing markets – helps explain why the Medicare procurement plan will work badly and what can be done to enable it to work well.

At Freakonomics, Ian Ayres presents an op-ed co-written with Peter Cramton, “Fix Medicare’s Bizarre Auction Program,” that lays out two of the fatal flaws with the Medicare auction plan. The op-ed links to a brief analysis by Cramton and Brett Katzman of the issue.

(An overview prepared by staff of the U.S. House Energy and Commerce subcommittee describes the background and current state of Medicare’s payment system. Perhaps surprisingly, even the fatally flawed procurement auctions have produced cost savings of up to 56 percent on certain medical supplies, but that is more a measure of how bad the current method is rather than a recommendation of the proposed procurement auction.)

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