Tuesday, May 29, 2018

Price-Linked Subsidies and Health Insurance Markups

Sonia Jaffe (Becker Friedman Institute For Research in Economics) and Mark Shepard (Harvard University) investigate Price-Linked Subsidies and Health Insurance Markups.

ABSTRACT: Subsidies in many health insurance programs depend on prices set by competing insurers – as prices rise, so do subsidies. We study the economics of these “price-linked” subsidies compared to “fixed” subsidies set independently of market prices. We show that price-linked subsidies weaken competition, leading to higher markups and raising costs for the government or consumers. However, price-linked subsidies have advantages when insurance costs are uncertain and optimal subsidies increase as costs rise. We evaluate this tradeoff empirically using a model estimated with administrative data from Massachusetts’ health insurance exchange. Relative to fixed subsidies, price-linking increases prices by up to 6% in a market with four competitors, and about twice as much when we simulate markets with two insurers. For levels of cost uncertainty reasonable in a mature market, we find that the losses from higher markups outweigh the benefits of price-linking.

https://lawprofessors.typepad.com/antitrustprof_blog/2018/05/price-linked-subsidies-and-health-insurance-markups.html

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