The Consequences of a Public Health Insurance Option: Evidence from Medicare Part D

This paper structurally estimates a demand and supply model of Medicare Part D and evaluates counterfactual scenarios that introduce a public option competing alongside private insurers. The results show that a public option with a cost advantage expands coverage and crowds out private insurer enrollment, but has little effect on market premiums. Additional subsidy payments covering the expanded base of enrollees offset welfare gains regardless of the public option's cost position. In scenarios where private insurers cream skim the public option, risk adjustment payments create a pricing wedge that acts as a de facto subsidy for private insurers and a tax on the public option, limiting the public option's penetration but improving welfare through lower private insurer premiums. Risk corridors can be used as a lever to regulate the pricing wedge and redistribute surplus.