Mark Shepard

Price-Linked Subsidies and Health Insurance Markups

Subsidies in many health insurance programs depend on prices set by competing insurers – as prices rise, so do subsidies. We study the economics of these “price-linked” subsidies compared to “fixed” subsidies set independently of market prices. We show that price-linked subsidies weaken competition, leading to higher markups and raising costs for the government or consumers. However, price-linked subsidies have advantages when insurance costs are uncertain and optimal subsidies increase as costs rise. We evaluate this tradeoff empirically using a model estimated with administrative data from Massachusetts’ health insurance exchange. Relative to fixed subsidies, price-linking increases prices by up to 6% in a market with four competitors, and about twice as much when we simulate markets with two insurers. For levels of cost uncertainty reasonable in a mature market, we find that the losses from higher markups outweigh the benefits of price-linking.

Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts

How much are low-income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts’ subsidized insurance exchange, we exploit discontinuities in the subsidy schedule to estimate willingness to pay and costs of insurance among low-income adults. As subsidies decline, insurance take-up falls rapidly, dropping about 25% for each

The Evolution of Health Insurer Costs in Massachusetts, 2010-12

40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower-cost, consistent with adverse selection into insurance. But across the entire distribution we can observe – approximately the bottom 70% of the willingness to pay distribution – enrollee willingness to pay is always less than half of own expected costs. As a result, we estimate that take-up will be highly incomplete even with generous subsidies: if enrollee premiums were 25% of insurers’ average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10% of average costs would still leave at least 20% uninsured. We suggest an important role for uncompensated care for the uninsured in explaining these findings and explore normative implications.

Health Plan Payment in Medicaid Managed Care: A Hybrid Model of Regulated Competition

AbstractWe analyze the evolution of health insurer costs in Massachusetts between 2010 and 2012, paying particular attention to changes in the composition of enrollees. This was a period in which Health Maintenance Organizations (HMOs) increasingly used physician cost control incentives but Preferred Provider Organizations (PPOs) did not. We show that cost growth and its components cannot be understood without accounting for (1) consumers’ switching between plans, and (2) differences in cost characteristics between new entrants and those leaving the market. New entrants are markedly less costly than those leaving (and their costs fall after their entering year), so cost growth of continuing enrollees in a plan is significantly higher than average per-member cost growth. Relatively high-cost HMO members switch to PPOs while low-cost PPO members switch to HMOs, so the impact of cost control incentives on HMO costs is likely different from their impact on market-wide insurer costs.

Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange

Medicaid, the government program for providing health insurance to low-income and disabled Americans, is the largest health insurer in the United States with more than 73 million enrollees. It is also the sector of the U.S. public health insurance system that relies most heavily on the tools of regulated competition with more than 60% of its enrollees enrolled in a private health plan in 2014. However, regulated competition in Medicaid differs from the typical model, emphasizing the tools of competitive procurement -- such as competitive bidding, the threat of exclusion from the market, and auto-assignment of enrollees to plans -- to attempt to improve efficiency, instead of relying primarily on the forces of consumer demand. In this paper, we discuss how Medicaid combines the tools of competitive procurement with the tools of regulated competition and some potential consequences of this hybrid model.