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Market Design in Regulated Health Insurance Markets: Risk Adjustment vs. Subsidies

Author

Listed:
  • Liran Einav
  • Amy Finkelstein
  • Pietro Tebaldi

Abstract

Health insurance is increasingly provided through managed competition, in which subsidies for consumers and risk adjustment for insurers are key market design instruments. We illustrate that subsidies offer two advantages over risk adjustment in markets with adverse selection. They provide greater flexibility in tailoring premiums to heterogeneous buyers, and they produce equilibria with lower markups and greater enrollment. We assess these effects using demand and cost estimates from the California Affordable Care Act marketplace. Holding government spending fixed, we estimate that subsidies can increase enrollment by 16 percentage points (76%) over risk adjustment, while all consumers are weakly better off.

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  • Liran Einav & Amy Finkelstein & Pietro Tebaldi, 2024. "Market Design in Regulated Health Insurance Markets: Risk Adjustment vs. Subsidies," NBER Working Papers 32586, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32586
    Note: EH IO PE
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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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