NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Price-Linked Subsidies and Imperfect Competition in Health Insurance

Sonia P. Jaffe, Mark Shepard

NBER Working Paper No. 23104
Issued in January 2017, Revised in April 2018
NBER Program(s):Health Care, Industrial Organization, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w23104

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