Caltech Research Shows Medicare Auction Will Face Severe Difficulties

The Center for Medicare and Medicaid Services (CMS) implemented the purchasing process—a novel type of auction—in nine metropolitan areas across the country last year and plans to expand it to 91 in 2013.

The competitive bidding process was designed to improve the efficiency of Medicare's procurement system, potentially saving taxpayers hundreds of millions of dollars. But many experts have criticized the auction, pointing out fundamental flaws in its design. Now, a series of experiments testing the auction structure show that it does, in fact, fall short of expectations. The results of the study, which was conducted by Caltech seniors Brian Merlob and Yuanjun Zhang, and Charles Plott, the Harkness Professor of Political Science and Economics, were published in the May issue of the Quarterly Journal of Economics.