Price-Linked Subsidies and Imperfect Competition in Health Insurance

Citation:

Jaffe, Sonia, and Mark Shepard. 2020. “Price-Linked Subsidies and Imperfect Competition in Health Insurance”. American Economic Journal: Economic Policy 12 (3) : 279-311.
Paper754 KB
Online Appendix898 KB

Date Published:

2016

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 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.

Published Version

Last updated on 11/02/2020