Socially Optimal Subsidies For Entry: The Case Of Medicare Payments To Hmos*
- Publication Type:
- Journal Article
- Citation:
- International Economic Review, 2011, 52 (1), pp. 105 - 129
- Issue Date:
- 2011-02-01
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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. © (2011) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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