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Performance Pay in Insurance Markets: Evidence from Medicare

Author

Listed:
  • Michele Fioretti

    (Department of Economics, Sciences Po)

  • Hongming Wang

    (Center for Global Economic Systems, Hitotsubashi University)

Abstract

Public procurement bodies increasingly resort to pay-for-performance contracts to promote efficient spending. We show that firm responses to pay-for-performance can widen the inequality in accessing social services. Focusing on the U.S. Medicare Advantage market, we find that insurers with higher quality ratings responded to bonus payments by selecting healthier enrollees with premium differences across counties. Selection is profitable because the quality rating fails to adjust for differences in the health of enrollees. Selection inflated the bonus payments and shifted the supply of high-rated insurance to the healthiest counties, hurting the healthcare access of sicker patients in the riskiest counties.

Suggested Citation

  • Michele Fioretti & Hongming Wang, 2020. "Performance Pay in Insurance Markets: Evidence from Medicare," Working Papers 2020.03, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2020.03
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    Keywords

    pay-for-performance; Medicare Advantage; risk selection; quality ratings; health insurance access;
    All these keywords.

    JEL classification:

    • I - Health, Education, and Welfare

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