The Optimal Geographic Distribution of Managed Competition Subsidies
Paper, joint with Keaton Miller, Amil Petrin, and Michael Chernew
Abstract:
Governments often intervene in several markets through `managed competition' where firms compete for per-consumer subsidies. We introduce a framework for determining the optimal market-level subsidy schedule that features heterogeneous consumers and firms that set prices and product characteristics in response to the subsidy. We apply it to the Medicare Advantage program, which offers Medicare recipients private insurance that replaces Traditional Medicare. We calculate counterfactual equilibria as a function of the subsidies by estimating product characteristic policy functions empirically and solving for Nash equilibria in prices. The consumer-welfare-maximizing budget-neutral schedule increases per-beneficiary annual consumer welfare by 113% over the current policy.