An Auction for Medicare Durable Medical Equipment: Evidence from an Industry Mock Auction

On 1 April 2011, 110 stakeholders in the Medicare Durable Medical Equipment (DME) industry came to the University of Maryland to discuss how the CMS’ current competitive bidding program could be improved. The participants included Medicare providers, government leaders, and auction experts. A major part of the event was the conduct of a mock auction based on the auction design proposed in Cramton (2011a). This design addresses the fatal flaws in the CMS design (Letter from experts 2010, 2011). The proposed design has been shown to be highly effective in theory (Cramton et al. 2011), in the experimental lab (Merlob et al. 2010), and in practice (Ausubel and Cramton 2004, 2006). This paper presents the mock auction results. The mock auction demonstrated the feasibility of the proposal as well as its excellent performance. Despite the complex bidding environment, the mock auction achieved high levels of economic efficiency: 97% of the potential gains from trade were realized. Moreover, the participants were able to understand the auction format and auction platform, and successfully execute bidding strategies for 6 products in 9 regions, all in a matter of hours. The conference also demonstrated the advantages of advancing the Medicare auctions through collaboration among industry, government, and auction experts. To avoid program failure, the Medicare auctions must be reformed to take advantage of modern auction methods. The mock auction demonstrates the high efficiency of the proposed approach.