Price-Linked Subsidies and Health Insurance Markups

Sonia Jaffe and Mark Shepard ()
Additional contact information
Mark Shepard: Harvard University

No 2017-084, Working Papers from Human Capital and Economic Opportunity Working Group

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.

Keywords: health insurance; health care pricing (search for similar items in EconPapers)
JEL-codes: I11 I13 L11 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-com, nep-hea, nep-ias, nep-ind and nep-mkt
Note: MIP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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http://humcap.uchicago.edu/RePEc/hka/wpaper/Jaffe_ ... health-insurance.pdf First version, July 3, 2017 (application/pdf)

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Working Paper: Price-Linked Subsidies and Health Insurance Markups (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hka:wpaper:2017-084

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