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Subsidy Design in Privately Provided Social Insurance: Lessons from Medicare Part D

Author

Listed:
  • Francesco Decarolis
  • Maria Polyakova
  • Stephen P. Ryan

Abstract

The efficiency of publicly subsidized, privately provisioned social insurance programs depends on the interaction between strategic insurers and the subsidy mechanism. We study this interaction in the context of Medicare’s prescription drug coverage program. We find that the observed mechanism is successful in keeping “raise-the-subsidy” incentives relatively low, acts much like a flat voucher, and obtains a level of welfare close to that for the optimal voucher. Across a range of counterfactuals, we find that more efficient subsidy mechanisms share three features: they retain the marginal elasticity of demand, limit the exercise of market power, and preserve the link between prices and marginal costs.

Suggested Citation

  • Francesco Decarolis & Maria Polyakova & Stephen P. Ryan, 2020. "Subsidy Design in Privately Provided Social Insurance: Lessons from Medicare Part D," Journal of Political Economy, University of Chicago Press, vol. 128(5), pages 1712-1752.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/705550
    DOI: 10.1086/705550
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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H4 - Public Economics - - Publicly Provided Goods
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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