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Performance Pay in Insurance Markets: Evidence from Medicare

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  • Michele Fioretti

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Hongming Wang

Abstract

Public procurement bodies increasingly resort to pay-for-performance contracts to promote efficient spending. We show that firm responses to pay-for-performance can widen the inequality in accessing social services. Focusing on the quality bonus payment initiative in Medicare Advantage, we find that higher quality-rated insurers responded to bonus payments by selecting healthier enrollees with premium differences across counties. Selection is profitable because the quality rating fails to adjust for differences in enrollee health. Selection inflated the bonus payments and shifted the supply of highrated insurance to the healthiest counties, reducing access to lower-priced, higher-rated insurance in the riskiest counties.

Suggested Citation

  • Michele Fioretti & Hongming Wang, 2021. "Performance Pay in Insurance Markets: Evidence from Medicare," Post-Print hal-03791843, HAL.
    • Handle: RePEc:hal:journl:hal-03791843
    DOI: 10.1162/rest_a_01127
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03791843
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    More about this item

    Keywords

    pay-for-performance; Medicare Advantage; risk selection; quality ratings; health insurance access;
    All these keywords.

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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