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Price-Linked Subsidies and Imperfect Competition in Health Insurance

Author

Listed:
  • Sonia P. Jaffe
  • Mark Shepard

Abstract

Policymakers subsidizing health insurance often face uncertainty about future market prices. We study the implications of one policy response: linking subsidies to prices, to target a given post-subsidy premium. We show that these price-linked subsidies weaken competition, raising prices for the government and/or consumers. However, price-linking also ties subsidies to health care cost shocks, which may be desirable. Evaluating this tradeoffs empirically using a model estimated with Massachusetts insurance exchange data, we find that price-linking increases prices 1-6%, and much more in less competitive markets. For cost uncertainty reasonable in a mature market, these losses outweigh the benefits of price-linking.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:23104
    Note: HC IO PE
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Amy Finkelstein & Nathaniel Hendren & Mark Shepard, 2017. "Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts," NBER Working Papers 23668, National Bureau of Economic Research, Inc.
    2. Mark Shepard, 2016. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange," NBER Working Papers 22600, National Bureau of Economic Research, Inc.
    3. Michael Geruso & Timothy J. Layton, 2017. "Selection in Health Insurance Markets and Its Policy Remedies," Journal of Economic Perspectives, American Economic Association, vol. 31(4), pages 23-50, Fall.
    4. Timothy Layton & Ellen J. Montz & Mark Shepard, 2017. "Health Plan Payment in U.S. Marketplaces: Regulated Competition with a Weak Mandate," NBER Working Papers 23444, National Bureau of Economic Research, Inc.
    5. repec:eee:jhecon:v:55:y:2017:i:c:p:262-273 is not listed on IDEAS

    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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