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

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  • 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 at voucher, and obtains a level of welfare close to 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, 2015. "Subsidy Design in Privately-Provided Social Insurance: Lessons from Medicare Part D," NBER Working Papers 21298, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21298
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    References listed on IDEAS

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    Cited by:

    1. Kate Ho & Joseph Hogan & Fiona Scott Morton, 2017. "The impact of consumer inattention on insurer pricing in the Medicare Part D program," RAND Journal of Economics, RAND Corporation, vol. 48(4), pages 877-905, December.
    2. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
    3. Amanda Starc & Robert J. Town, 2015. "Externalities and Benefit Design in Health Insurance," NBER Working Papers 21783, National Bureau of Economic Research, Inc.
    4. Michele Fioretti & Hongming Wang, 2019. "Subsidizing Inequality: Performance Pay and Risk Selection in Medicare," Working Papers hal-03393070, HAL.
    5. Maria Polyakova, 2016. "Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D," American Economic Journal: Applied Economics, American Economic Association, vol. 8(3), pages 165-195, July.
    6. Liran Einav & Amy Finkelstein & Maria Polyakova, 2016. "Private Provision of Social Insurance: Drug-specific Price Elasticities and Cost Sharing in Medicare Part D," NBER Working Papers 22277, National Bureau of Economic Research, Inc.
    7. Keaton S. Miller & Amil Petrin & Robert Town & Michael Chernew, 2019. "Optimal Managed Competition Subsidies," NBER Working Papers 25616, National Bureau of Economic Research, Inc.
    8. Michele Fioretti & Hongming Wang, 2020. "Performance Pay in Insurance Markets: Evidence from Medicare," Working Papers 2020.03, International Network for Economic Research - INFER.
    9. Bernard Salanié, 2017. "Equilibrium in Insurance Markets: An Empiricist’s View," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 42(1), pages 1-14, March.
    10. Sonia Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Health Insurance Markups," Working Papers 2017-084, Human Capital and Economic Opportunity Working Group.
    11. Michele Fioretti & Hongming Wang, 2021. "Performance Pay in Insurance Markets: Evidence from Medicare," Working Papers hal-03386584, HAL.
    12. Michele Fioretti & Hongming Wang, 2019. "Subsidizing Inequality: Performance Pay and Risk Selection in Medicare," Sciences Po Economics Discussion Papers 2019-15, Sciences Po Departement of Economics.
    13. Naoki Aizawa & You Suk Kim, 2015. "Advertising and Risk Selection in Health Insurance Markets," Finance and Economics Discussion Series 2015-101, Board of Governors of the Federal Reserve System (U.S.).
    14. Woodard, Joshua, 2016. "Estimation of Insurance Deductible Demand under Endogenous Premium Rates," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236151, Agricultural and Applied Economics Association.
    15. Daniel W. Sacks & Khoa Vu & Tsan-Yao Huang & Pinar Karaca-Mandic, 2017. "How do insurance firms respond to financial risk sharing regulations? Evidence from the Affordable Care Act," NBER Working Papers 24129, National Bureau of Economic Research, Inc.
    16. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 237-309, Elsevier.
    17. Sonia P. Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Imperfect Competition in Health Insurance," NBER Working Papers 23104, National Bureau of Economic Research, Inc.
    18. Jonathan D. Ketcham & Nicolai V. Kuminoff & Christopher A. Powers, 2016. "Estimating the Heterogeneous Welfare Effects of Choice Architecture: An Application to the Medicare Prescription Drug Insurance Market," NBER Working Papers 22732, National Bureau of Economic Research, Inc.
    19. Abraham, Jean & Drake, Coleman & Sacks, Daniel W. & Simon, Kosali, 2017. "Demand for health insurance marketplace plans was highly elastic in 2014–2015," Economics Letters, Elsevier, vol. 159(C), pages 69-73.
    20. Johannes G. Jaspersen & Marc A. Ragin & Justin R. Sydnor, 2019. "Predicting Insurance Demand from Risk Attitudes," NBER Working Papers 26508, National Bureau of Economic Research, Inc.
    21. Florian Heiss & Daniel McFadden & Joachim Winter & Amelie Wuppermann & Bo Zhou, 2016. "Inattention and Switching Costs as Sources of Inertia in Medicare Part D," NBER Working Papers 22765, National Bureau of Economic Research, Inc.

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    More about this item

    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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