Harvard Research: Competitive bidding doesn’t work This paper studies the impact of using competitive bidding to set health care prices. Exploiting the staggered introduction of the DME competitive bidding program across different metropolitan statistical areas in the U.S., difference-in-differences estimates show that on average, the program led to a 45% reduction in price and a 11% reduction in the share of beneficiaries using DME. Several pieces of evidence suggest that the reduction in utilization was the result of a supply shortage following the introduction of competitive bidding.
One primary cause of this shortage appears to be the auction design. I investigate this hypoth- esis by estimating a stylized model of suppliers bidding in the DME auction and find that prices generated by the auction were on average 6% below the market clearing price, creating shortages in supply. Counterfactual simulations show that feasible alternative auctions could save 43% in government spending relative to the administratively set prices while maintaining the previous quantity in the market.
Competitive bidding has been widely touted as a solution to controlling health care costs and enhancing competition. However, analysis of the DME competitive bidding program shows that economic tools may not yield their intended results when improperly applied. The paper finds large pricing inefficiencies in the current administrative fee schedule. The results highlight the importance of auction design and the potential for a well-designed competitive bidding to generate large savings in health care.
This paper has several limitations to be addressed in future work. First, the paper does not directly analyze any changes in the quality of the products, which, as documented by Decarolis (2014) in the context of Italian public works, could occur as prices fall. Second, throughout the paper, the optimal price is discussed in a static sense, without taking into consideration possible dynamic gains from future product innovation, which may require positive supplier surplus. Fur- thermore, the paper discusses the optimal price based on the existing level of utilization; in reality, the current utilization may not in fact be optimal from a clinical perspective. Further analysis of patient health outcomes could improve our understanding of the impact on patient welfare. Finally, the paper has abstracted away from spillover effects onto the privately insured. As shown in Clemens and Gottlieb (2017), Medicare payment policy can have a large impact on private payers. An analysis of the privately insured market will help paint a more complete picture of the impact of the DME competitive bidding program.
https://scholar.harvard.edu/files/yunan/files/dme.pdf