Price-Linked Subsidies and Imperfect Competition in Health Insurance

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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 tradeoff 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.

NBER Working Paper #23104


Conditionally accepted, AEJ: Economic Policy 
Note that a previous version of this paper circulated under the title "Price-Linked Subsidies and Health Insurance Markups."
Last updated on 07/01/2019