Premium Transparency in the Medicare Advantage Market: Implications for Premiums, Benefits, and Efficiency

Karen Stockley, Thomas McGuire, Christopher Afendulis and Michael E. Chernew

No 20208, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the Medicare Advantage (MA) market, private health insurers compete to offer plans with the most attractive premium and benefit package. Medicare provides a subsidy, based on a "benchmark payment rate", for each Medicare beneficiary a plan enrolls. We investigate how this subsidy, the primary policy lever in the market, affects the equilibrium premiums and benefits of MA plans. We exploit variation in benchmark payment rates within plans over time, coming from rebasing years where benchmark changes differed across areas in ways that were plausibly exogenous, to determine empirically how plan premiums and benefit generosity respond to changes in benchmarks. We find that premiums do not respond to changes in the benchmark payment rate on average but that insurers do pass through a portion of the benchmark increase by increasing plan benefit generosity. We argue that the way premium information is communicated to consumers influences the way in which plans pass through subsidy dollars and can account for the empirical results. More specifically, institutional features make it difficult for consumers to observe a large component of the plan premium, leading to a lack of demand response to premium reductions below the premium charged by traditional Medicare (the fee-for-service Part B premium). When demand does not respond to lower premiums, plans have an incentive to pass-through cost subsidies to consumers via more generous benefits that consumers may not value at cost, creating an inefficiently high level of benefit generosity. Our results provide evidence that a lack of premium transparency in the MA market may distort the combination of premium levels and benefit generosity offered in equilibrium, resulting in some degree of inefficiently high benefits. We conclude by discussing changes to the choice environment that would increase premium transparency and potentially soften the premium rigidities we find.

JEL-codes: I11 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-com and nep-ias
Note: EH
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.nber.org/papers/w20208.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:20208

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w20208

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().