Entry and Competition in Insurance Markets: Evidence from Medicare Advantage
Abstract:
Governments frequently turn to private markets to deliver public benefits. This structure can lower the government’s costs if it designs a payment system that attracts competitive firms with cost controls the government lacks. In this paper, I analyze the implications of this system for the Medicare Advantage program. I use administrative data to develop and estimate a model of firm entry and product offering decisions that captures how firms endogenously respond to government policies as well as consumer sorting and utilization of health insurance. I then use the model to simulate other payment policies in Massachusetts. I find that under the current design, the government overpays firms for their participation and the enrollment they generate. Under a policy that lowers firm payments and transfers a portion of this money to consumers, the government can reduce spending by roughly $276 million ($350 per enrollee). This policy incentivizes similar firm participation and enrollment, while more equitably distributing surplus across healthy and sick consumers.