San Francisco (June 13, 2011)—A new research study released by the Pacific Research Institute (PRI), a California-based free-market think tank, reviews the auction design process currently established by the Centers for Medicare and Medicaid Services (CMS) for medical devices and equipment. That process creates important adverse economic effects: It yields prices for equipment that are substantially lower than those that would emerge in a competitive market. “Medicare Auctions for Durable Medical Equipment” was authored by PRI senior policy fellow Benjamin Zycher, Ph.D.
The artificially low prices have a significant adverse impact on investment in the research and development of new medical technologies. With this flawed auction system, prices for medical devices and equipment are likely to be about one-third to two-thirds below the competitive price. Accordingly, market incentives to invest in new medical technologies will be reduced as well. Investment would be reduced by 12-15 percent or approximately $2.1-$3.1 billion annually from 2011 through 2020.
According to Dr. Zycher, “This investment loss would cause, conservatively, a loss of about 500,000 expected life-years each year, the economic cost of which would be about $50 billion per year, which is substantially greater than the entire U.S. market for medical devices and equipment.”
Various auction designs have different effects in terms of price and allocation outcomes. Such government agencies as the Centers for Medicare and Medicaid Services have powerful incentives to pursue budget savings rather than economic efficiency, or patient wellbeing, in resource use. The study demonstrates that the auction design used by CMS yields poor economic incentives and inadequate investment in the advance of medical technologies. The magnitude of this adverse economic effect suggests strongly that reform of the Centers for Medicare and Medicaid Services auction process should be a high priority for policymakers.
Medicare Auctions for Durable Medical Equipment
To learn more about the Medicare Auctions for Durable Medical Equipment: Price Suppression and Research and Development Investment report or to arrange an interview with author Benjamin Zycher, please contact PRI’s Press Office at (415) 955-6145 or [email protected].