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Subsidizing Inequality: Performance Pay and Risk Selection in Medicare

Author

Listed:
  • Michele Fioretti

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Hongming Wang

    (Hitotsubashi University)

Abstract

Pay-for-performance is commonly employed to improve the quality of social services contracted out to firms. We show that insurer responses to pay-for-performance can widen the inequality in accessing social services. Focusing on the U.S. Medicare Advantage market, we find that high-quality insurance contracts responded to quality-linked payments by selecting healthier enrollees with premium differences across counties. The selection is profitable because the quality rating fails to adjust for pre-existing health differences of enrollees. As a result, quality improved mostly due to selection, and the supply of high-quality insurance shifted to the healthiest counties. Revising the quality rating could prevent these unintended consequences.

Suggested Citation

  • Michele Fioretti & Hongming Wang, 2019. "Subsidizing Inequality: Performance Pay and Risk Selection in Medicare," SciencePo Working papers Main hal-03393070, HAL.
    • Handle: RePEc:hal:spmain:hal-03393070
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03393070
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    More about this item

    Keywords

    Pay-for-Performance; Quality Bonus Payment Demonstration; Medicare Advantage; Risk Selection; Supply-Side Selection; Quality Ratings; Health Inequality;
    All these keywords.

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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