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The Impact of a Public Option in the Health Insurance Market

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  • Andrei Barbos

    (Department of Economics, University of South Florida)

  • Yi Deng

    (Department of Economics, University of South Florida)

Abstract

We develop a framework where to examine the implications of the introduction of a non- profit "public option" in the U.S. health insurance market. In this model, a continuum of heterogeneous consumers, each facing unknown medical expenditures, and differing in their expectations of such expenditures, have to choose between two competing plans. One plan is offered by a profit-maximizing private insurer; the other by social-welfare-maximizing public option. The model is calibrated based on data of U.S. medical expenditures and estimation of a Bayesian hierarchical model. The Nash Equilibrium of the resulting market structure is solved using a numerical algorithm. In equilibrium, the distinct objectives of the two insurers induce adverse selection in consumer choice: the public option covers the less healthy consumers, yielding the more profitable segment of market to the private insurer. However, our empirical results suggest that both insurers will capture significant parts of the health insurance market.

Suggested Citation

  • Andrei Barbos & Yi Deng, 2013. "The Impact of a Public Option in the Health Insurance Market," Working Papers 0813, University of South Florida, Department of Economics.
    • Handle: RePEc:usf:wpaper:0813
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    References listed on IDEAS

    as
    1. Jeffrey R. Brown & Amy Finkelstein, 2008. "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 98(3), pages 1083-1102, June.
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    7. Ham, John C. & Shore-Sheppard, Lara, 2005. "The effect of Medicaid expansions for low-income children on Medicaid participation and private insurance coverage: evidence from the SIPP," Journal of Public Economics, Elsevier, vol. 89(1), pages 57-83, January.
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    1. Would a public option drive private health insurance out?
      by Economic Logician in Economic Logic on 2012-09-12 19:41:00

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    More about this item

    Keywords

    Public Health Insurance; Bayesian Hierarchial Model;

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises

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