Price-Linked Subsidies and Imperfect Competition in Health Insurance

67 Pages Posted: 30 Jan 2017 Last revised: 17 Feb 2023

See all articles by Sonia Jaffe

Sonia Jaffe

University of Chicago

Mark Shepard

Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2017

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.

Suggested Citation

Jaffe, Sonia and Shepard, Mark, Price-Linked Subsidies and Imperfect Competition in Health Insurance (January 2017). NBER Working Paper No. w23104, Available at SSRN: https://ssrn.com/abstract=2907907

Sonia Jaffe (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Mark Shepard

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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