The Optimal Geographic Distribution of Managed Competition Subsidies
Governments often subsidize the purchase of goods or services from competing firms rather than producing them directly. One common mechanism they use is ‘managed competition’, where firms compete for consumers and a subsidy that follows them. We introduce a framework for determining the optimal market-level subsidy schedule that features heterogeneous consumers and firms that set prices and product characteristics in response to the subsidy. We apply it to the Medicare Advantage program, which offers Medicare recipients private insurance that replaces Traditional Medicare. We calculate counterfactual equilibria as a function of the subsidies by estimating product characteristic policy functions empirically and solving for Nash equilibria in prices. The consumer-welfare-maximizing budget-neutral schedule increases aggregate annual consumer welfare by $7 billion over the current policy.
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Copy CitationKeaton S. Miller, Amil Petrin, Robert Town, and Michael Chernew, "The Optimal Geographic Distribution of Managed Competition Subsidies," NBER Working Paper 25616 (2019), https://doi.org/10.3386/w25616.Download Citation
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