Working Paper: NBER ID: w21298
Authors: Francesco Decarolis; Maria Polyakova; Stephen P. Ryan
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 at voucher, and obtains a level of welfare close to 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.
Keywords: Medicare; subsidy design; social insurance; insurance markets
JEL Codes: H2; H4; I11; I18; L1; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| subsidy mechanism (H20) | insurer margins (G22) |
| subsidy mechanism (H20) | prices (P22) |
| government's ability to adjust subsidies (H23) | optimal sorting of consumers (D11) |
| optimal sorting of consumers (D11) | welfare outcomes (I38) |
| subsidy design (H20) | market outcomes (P42) |
| subsidy mechanism (H20) | consumer choices (D10) |
| subsidy mechanism (H20) | pricing strategies of insurers (G52) |
| misalignment in consumer purchasing behaviors (D16) | welfare (I38) |