NCPA - National Center for Policy Analysis

The Federal Government's Deeply Flawed System for Controlling Medicare Costs

December 26, 2011

With Medicare's hospital trust fund set to be exhausted by 2024 according to the latest report from the program's trustees, federal officials are understandably looking for easy ways to cut spending in the entitlement program.  On this subject, they emphasize the efficacy of the two-year-old effort to introduce "competitive bidding" into the process for buying medical equipment, says Sally Pipes, president and CEO of the Pacific Research Institute.

The Centers for Medicare and Medicaid Services (CMS) launched its competitive bidding program for medical devices and equipment in 2009.  It purchases a host of medical supplies and equipment through the auctions, touting the method as the best means by which the government can efficiently spend taxpayer money.  However, the market-subverting policies of the CMS auctions have many deleterious effects on health care throughout the United States.

  • Irrational auction rules and a non-binding bidding process drive legitimate suppliers out of the market and set prices at below-equilibrium levels.
  • The loss of legitimate suppliers often causes shortages of vital medical equipment and supplies.
  • The depressed prices from CMS auctions decrease investment in health care research and development by between $2.1 billion and $3.1 billion each year.
  • It is estimated that this depressed investment, by limiting health care innovation, causes the loss of 500,000 life-expectancy years in the United States.

These negative effects should not be ignored.  Medicare and Medicaid policies have substantial effects on the health care market as a whole: the two programs shelled out $10.4 billion of the $34.9 billion the nation spent on medical equipment in 2009, and this figure is expected to rise to 40 percent over the next decade.

In order to avoid these negative consequences and maximize optimization gains from auctions, CMS should consider market-favored alterations to its system.

Source: Sally Pipes, "The Federal Government's Deeply Flawed System for Controlling Medicare Costs," Forbes, December 12, 2011.

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