Supply-Side Responses to Public Quality Ratings: Evidence from Medicare Advantage

Since 2009, the Centers for Medicare and Medicaid Services (CMS) has distributed quality star ratings for Medicare Advantage (MA) contracts to better inform Medicare-eligible individuals of MA plan quality. This paper examines the extent to which the quality star rating scheme affected insurer behavior in the MA market. We identify the causal effect of 2009 star ratings on 2010 MA premiums using a regression discontinuity design that exploits plausibly random variation around threshold values underlying the star rating calculations. We find that contracts with higher star ratings in 2009 significantly increased their average 2010 monthly premiums relative to contracts just below the respective threshold values, with increases of more than $26 per month among 3.5- and 4-star contracts. We present additional evidence that the estimated premium increases in 2010 are not purely the result of demand shifts in the prior year. Furthermore, the 2009 star ratings have a significant effect on plan mix, where 3-star contracts disproportionately dropped their $0 premium plans while 2.5-, 3.5-, and 4-star contracts disproportionately expanded plans into new markets, particularly plans with positive monthly premiums. Broadly, our analysis reveals a relatively large supply-side response to published quality ratings, suggesting some level of caution as policy makers extend quality rating systems into new health-care markets.