Subsidy Design in Privately Provided Social Insurance: Lessons from Medicare Part D

Francesco Decarolis, Maria Polyakova and Stephen Ryan

Journal of Political Economy, 2020, vol. 128, issue 5, 1712 - 1752

Abstract: The efficiency of publicly subsidized, privately provisioned social insurance programs depends on the interaction between strategic insurers and the subsidy mechanism. We study this interaction in the context of Medicare’s prescription drug coverage program. We find that the observed mechanism is successful in keeping “raise-the-subsidy” incentives relatively low, acts much like a flat voucher, and obtains a level of welfare close to that for the optimal voucher. Across a range of counterfactuals, we find that more efficient subsidy mechanisms share three features: they retain the marginal elasticity of demand, limit the exercise of market power, and preserve the link between prices and marginal costs.

Date: 2020
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Working Paper: Subsidy Design in Privately-Provided Social Insurance: Lessons from Medicare Part D (2015)
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