Competitive bidding for health insurance contracts: lessons from the online HMO auctions

  • Alok Gupta
  • Stephen T. Parente
  • Pallab Sanyal


Healthcare is an important social and economic component of modern society, and the effective use of information technology in this industry is critical to its success. As health insurance premiums continue to rise, competitive bidding may be useful in generating stronger price competition and lower premium costs for employers and possibly, government agencies. In this paper, we assess an endeavor by several Fortune 500 companies to reduce healthcare procurement costs for their employees by having HMOs compete in open electronic auctions. Although the auctions were successful in generating significant cost savings for the companies in the first year, i.e., 1999, they failed to replicate the success and were eventually discontinued after two more years. Over the past decade since the failed auction experiment, effective utilization of information technologies have led to significant advances in the design of complex electronic markets. Using this knowledge, and data from the auctions, we point out several shortcomings of the auction design that, we believe, led to the discontinuation of the market after three years. Based on our analysis, we propose several actionable recommendations that policy makers can use to design a sustainable electronic market for procuring health insurance.


Electronic market design Auctions Health insurance procurement HMO 

JEL Classification

I1 D44 G22 


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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  • Alok Gupta
    • 1
  • Stephen T. Parente
    • 2
  • Pallab Sanyal
    • 3
  1. 1.Department of Information and Decision SciencesCarlson School of Management, University of Minnesota MinneapolisUSA
  2. 2.Department of FinanceCarlson School of Management, University of MinnesotaMinneapolisUSA
  3. 3.Department of Information Systems and Operations Management, School of Management George Mason UniversityFairfaxUSA

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