In 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act, which required that in 2006 the Centers for Medicare and Medicaid Services (CMS) implement a system of competitive bids to set payments for the Medicare Advantage program. Managed care plans now bid for the right to enroll Medicare beneficiaries. Data from the first year of bidding suggest that imperfect competition is limiting the success of the bidding system. This article offers suggestions to improve this system based on findings from auction theory and previous government-run auctions. In particular, CMS can benefit by adjusting its system of competitive bids in four ways: credibly committing to regulations governing bidding; limiting the scope for collusion, entry deterrence, and predatory behavior among bidders; adjusting how benchmark reimbursement rates are set; and accounting for asymmetric information among bidders.

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