Subsidizing Inequality: Performance Pay and Risk Selection in Medicare

Michele Fioretti and Hongming Wang
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Hongming Wang: Hitotsubashi University

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Abstract: Pay-for-performance is commonly employed to improve the quality of social services contracted out to firms. We show that insurer responses to pay-for-performance can widen the inequality in accessing social services. Focusing on the U.S. Medicare Advantage market, we find that high-quality insurance contracts responded to quality-linked payments by selecting healthier enrollees with premium differences across counties. The selection is profitable because the quality rating fails to adjust for pre-existing health differences of enrollees. As a result, quality improved mostly due to selection, and the supply of high-quality insurance shifted to the healthiest counties. Revising the quality rating could prevent these unintended consequences.

Keywords: Pay-for-Performance; Quality Bonus Payment Demonstration; Medicare Advantage; Risk Selection; Supply-Side Selection; Quality Ratings; Health Inequality (search for similar items in EconPapers)
Date: 2019-11-01
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Working Paper: Subsidizing Inequality: Performance Pay and Risk Selection in Medicare (2019)
Working Paper: Subsidizing Inequality: Performance Pay and Risk Selection in Medicare (2019)
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