Designed to Fail: The Medicare Auction for Durable Medical Equipment

17 Pages Posted: 21 Nov 2014

See all articles by Peter Cramton

Peter Cramton

University of Maryland - Department of Economics

Sean Ellermeyer

Kennesaw State University

Brett Katzman

University of Miami - School of Business Administration - Department of Economics

Date Written: January 2015

Abstract

We examine the theoretical properties of the auction for Medicare Durable Medical Equipment. Two unique features of the Medicare auction are (1) winners are paid the median winning bid and (2) bids are nonbinding. We show that median pricing results in allocation inefficiencies as some high‐cost firms potentially displace low‐cost firms as winners. Further, the auction may leave demand unfulfilled as some winners refuse to supply because the price is set below their cost. We also introduce a model of nonbinding bids that establishes the rationality of a lowball bid strategy employed by many bidders in the actual Medicare auctions and recently replicated in Caltech experiments. We contrast the median‐price auction with the standard clearing‐price auction where each firm bids true costs as a dominant strategy, resulting in competitive equilibrium prices and full efficiency.

JEL Classification: D44, I11, H57

Suggested Citation

Cramton, Peter C. and Ellermeyer, Sean and Katzman, Brett Eric, Designed to Fail: The Medicare Auction for Durable Medical Equipment (January 2015). Economic Inquiry, Vol. 53, Issue 1, pp. 469-485, 2015. Available at SSRN: https://ssrn.com/abstract=2528799 or http://dx.doi.org/10.1111/ecin.12101

Peter C. Cramton (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-6987 (Phone)
301-405-3542 (Fax)

Sean Ellermeyer

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

Brett Eric Katzman

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States
305-284-1654 (Phone)

HOME PAGE: http://www.bus.miami.edu/~eco/aaa/faculty/List/katzman.htm

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