Walmart sells a walker called the Carex Explorer
for $63.98. Medicare covers the Explorer, but it
used to pay between $99.77 and $143.65 (CGS 2015). As a result of
competitive bidding, the current price ranges from $44.90 to $50.61
(CGS 2018). Between 1989 and 2011, Medicare paid for equipment such
as walkers using a fee schedule equal to 95 percent of a product’s
average wholesale price (an unverified number provided by manufacturers). This system kept Medicare fees substantially higher than typical retail prices.
As a part of the Medicare Modernization Act of 2003, Medicare
accepted bids for ten types of equipment in ten metropolitan areas.
The median accepted bid was 26 percent lower than the existing Medicare fee. Equipment manufacturers and retailers responded by lobbying Congress to discard the bids and delay the program, and the House
of Representatives obliged by passing a bill to ditch the bids. In fact,
it was only with the passage of the Affordable Care Act that Medicare
was able to launch competitive bidding in 2011 (Newman, Barrette, and
McGraves-Lloyd 2017). Even though Medicare anticipated savings of
45 percent on competitively bid products and 72 percent for mail-order
products, in 2015 then congressman Tom Price and 82 cosponsors
introduced a bill to suspend competitive bidding (Newman, Barrette,
and McGraves-Lloyd 2017). Although the bill did not become law, this
example demonstrates three points. First, a well-designed bidding
process can result in lower prices for public programs. Second, such
programs are expensive and take a long time to set up and implement.
Case 16.1
(continued)
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260 Economics for Healthcare Managers
16.1.3 Static Resource Allocation
Perfectly competitive markets allocate products efficiently to the consumers
most willing to pay for them. In other words, production and consumption
are efficient. Products are produced as inexpensively as possible. No resources
are wasted in making goods and providing services. Reorganization of production would increase costs.
Exchanges of goods and services in perfectly competitive markets all
take place at the same price. As a result, consumers who value products will
buy them. Products are not wasted on consumers who feel the products are
worth less than the amount spent to produce them.
Perfectly competitive markets result in an optimal mix of output.
Their combination of lowest-cost production and highest-value consumption
means that changes would reduce satisfaction. At the competitive optimum,
price equals marginal benefit, which in turn equals marginal cost. Shifts in the
output of the economy would cause the marginal cost to be higher or lower
than the marginal value to consumers, which would not be optimal.
Third, efforts to switch to a bidding process will
encounter opposition from those whose profits are
at risk.
Some supplier organizations argue that that the program encourages bidders to offer only the lowest-cost products rather than those
best suited to beneficiaries’ needs. An analysis reported that competitive bidding did not affect beneficiary access and satisfaction (US Government Accountability Office 2014).
Discussion Questions
• What are the risks of a bidding process like the one described in
this case?
• Why would elected representatives side with the manufacturers and
retailers on this issue?
• If Medicare sought bids for cardiac care to serve beneficiaries in
your hometown, what would happen economically and politically?
• Bidding has led to a drop in the number of medical equipment
firms. Is this drop a concern?
• Could you design a way of insulating Medicare from political
pressure? Would you want to?
• What problems other than paying too much might distorted fee
schedules cause?
