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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.

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Bibliographic Info

Paper provided by University of South Florida, Department of Economics in its series Working Papers with number 0813.

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Length: 38 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:usf:wpaper:0813

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Keywords: Public Health Insurance; Bayesian Hierarchial Model;

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  1. Lara D. Shore-Sheppard & John C. Ham, 2003. "The Effect of Medicaid Expansions for Low-Income Children on Medicaid Participation and Private Insurance Coverage : Evidence from the SIPP," Department of Economics Working Papers 2003-10, Department of Economics, Williams College.
  2. Lo Sasso, Anthony T. & Buchmueller, Thomas C., 2004. "The effect of the state children's health insurance program on health insurance coverage," Journal of Health Economics, Elsevier, vol. 23(5), pages 1059-1082, September.
  3. 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.
  4. David M. Cutler & Jonathan Gruber, 1995. "Does Public Insurance Crowd Out Private Insurance?," NBER Working Papers 5082, National Bureau of Economic Research, Inc.
  5. Krawczyk, Jacek & Zuccollo, James, 2006. "NIRA-3: An improved MATLAB package for finding Nash equilibria in infinite games," MPRA Paper 1119, University Library of Munich, Germany.
  6. Gruber, Jonathan & Simon, Kosali, 2008. "Crowd-out 10 years later: Have recent public insurance expansions crowded out private health insurance?," Journal of Health Economics, Elsevier, vol. 27(2), pages 201-217, March.
  7. Leemore S. Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, American Economic Association, vol. 100(4), pages 1399-1431, September.
  8. Anirban Basu & Willard G. Manning & John Mullahy, 2004. "Comparing alternative models: log vs Cox proportional hazard?," Health Economics, John Wiley & Sons, Ltd., vol. 13(8), pages 749-765.
  9. Rask, Kevin N. & Rask, Kimberly J., 2000. "Public insurance substituting for private insurance: new evidence regarding public hospitals, uncompensated care funds, and medicaid," Journal of Health Economics, Elsevier, vol. 19(1), pages 1-31, 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 14:41:00

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