Who Benefits When the Government Pays More? Pass-Through in the Medicare Advantage Program

52 Pages Posted: 24 Mar 2014

See all articles by Mark Duggan

Mark Duggan

University of Pennsylvania - Business & Public Policy Department

Amanda Starc

Kellogg School of Management, Northweste

Boris Vabson

Harvard University - Department of Health Care Policy

Date Written: March 2014

Abstract

Governments contract with private firms to provide a wide range of services. While a large body of previous work has estimated the effects of that contracting, surprisingly little has investigated how those effects vary with the generosity of the contract. In this paper we examine this issue in the Medicare Advantage (MA) program, through which the federal government contracts with private insurers to coordinate and finance health care for more than 15 million Medicare recipients. To do this, we exploit a substantial policy-induced increase in MA reimbursement in metropolitan areas with a population of 250 thousand or more relative to MSAs just below this threshold. Our results demonstrate that the additional reimbursement leads more private firms to enter this market and to an increase in the share of Medicare recipients enrolled in MA plans. Our findings also reveal that only about one-fifth of the additional reimbursement is passed through to consumers in the form of better coverage. A somewhat larger share accrues to private insurers in the form of higher profits and we find suggestive evidence of a large impact on advertising expenditures. Our results have implications for a key feature of the Affordable Care Act that will reduce reimbursement to MA plans by $156 billion from 2013 to 2022.

Suggested Citation

Duggan, Mark and Starc, Amanda and Vabson, Boris, Who Benefits When the Government Pays More? Pass-Through in the Medicare Advantage Program (March 2014). NBER Working Paper No. w19989. Available at SSRN: https://ssrn.com/abstract=2413337

Mark Duggan (Contact Author)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Amanda Starc

Kellogg School of Management, Northweste ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
3303382067 (Phone)

Boris Vabson

Harvard University - Department of Health Care Policy ( email )

25 Shattuck Street
Boston, MA 02115
United States

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