Socially Optimal Subsidy for Entry: The Case of Medicare Payments to HMOs
نویسنده
چکیده
Should governments subsidize entry to promote competition? The US Medicare has increased its spending on private Medicare plans, based on the idea that they provide consumers more alternatives and enhance the programs e¢ ciency. In this paper, I develop an empirical framework with endogenous entry to evaluate welfare consequences of such policy interventions with the data from 2003 and 2004. Counterfactual simulation reveals the following: (1) in Medicare, subsidizing entry can be justi ed to enhance national welfare (no excessive entry); (2) the level of payments in 2008, however, is far beyond the optimal level; and (3) the geographic inconsistency between the payment rate and the Medicare fee-for-service (FFS) cost is another source of ine¢ ciency. Aligning payments with FFS costs raises the national welfare gain of contracting with private plans by an estimated 3 billion dollars, or 33 percent, compared to the simulated 2008 1I am thankful to Leemore Dafny, David Dranove, Michael Mazzeo, Aviv Nevo, and Robert Porter for guidance. Helpful comments from two anonymous referees, Raquel Bernal, Rosa Matzkin, and Hodaka Morita are gratefully acknowledged. I thank the Centers for Medicare and Medicaid Services for kindly providing the data les and answering my inquiries. E-mail: [email protected].
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