Working Paper: NBER ID: w23104
Authors: Sonia P. Jaffe; Mark Shepard
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 tradeoffs 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.
Keywords: health insurance; price-linked subsidies; competition; consumer costs
JEL Codes: I11; I13; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price-linked subsidies (P22) | prices for the pivotal plans (P22) |
| Fewer competitors (L19) | pricing distortion (L11) |
| Price-linked subsidies (P22) | losses incurred from higher prices outweigh benefits (D61) |
| Price-linked subsidies (P22) | distort price competition (L11) |