Price-Linked Subsidies and Imperfect Competition in Health Insurance

Sonia Jaffe and Mark Shepard

No 23104, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Policymakers subsidizing health insurance often face uncertainty about future market prices. We study the implications of one policy response: linking subsidies to prices, to target a given post-subsidy premium. We show that these price-linked subsidies weaken competition, raising prices for the government and/or consumers. However, price-linking also ties subsidies to health care cost shocks, which may be desirable. Evaluating this tradeoffs empirically using a model estimated with Massachusetts insurance exchange data, we find that price-linking increases prices 1-6%, and much more in less competitive markets. For cost uncertainty reasonable in a mature market, these losses outweigh the benefits of price-linking.

JEL-codes: I11 I13 L11 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-com, nep-hea and nep-ias
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Citations: View citations in EconPapers (15)

Published as Sonia Jaffe & Mark Shepard, 2020. "Price-Linked Subsidies and Imperfect Competition in Health Insurance," American Economic Journal: Economic Policy, vol 12(3), pages 279-311.

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Journal Article: Price-Linked Subsidies and Imperfect Competition in Health Insurance (2020)
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