Socially Optimal Subsidies for Entry: The Case of Medicare Payments to HMOs

Publisher:
Blackwell Publishing Limited
Publication Type:
Journal Article
Citation:
International Economic Review, 2011, 52 (1), pp. 105 - 129
Issue Date:
2011-01
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The U.S. Medicare program has increased its spending on private Medicare plans in anticipation of larger consumer surplus and higher efficiency. To evaluate the welfare consequences of such policy interventions, I develop an empirical model with endogenous entry. Counterfactual simulation reveals the following: subsidizing HMO entry can be justified to enhance national welfare (no excessive entry); the level of price subsidies in 2008, however, is far beyond the optimal level; and the geographic inconsistency between the subsidies and the Medicare fee-for-service costs is another source of inefficiency. Resolving this geographic inconsistency significantly raises national welfare by restructuring entry
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