Policymakers subsidizing health insurance often face uncertainty about future market prices. We study the implications of one policy response: linking subsidies to prices to target a given postsubsidy premium. We show that these price-linked subsidies weaken competition, raising prices for the government and/or consumers. However, price-linking also ties subsidies to health care cost shocks, which may be desirable. Evaluating this tradeoff empirically, using a model estimated with Massachusetts insurance exchange data, we find that price-linking increases prices 1–6 percent, and much more in less competitive markets. For cost uncertainty reasonable in a mature market, these losses outweigh the benefits of price-linking.
Jaffe, Sonia, and Mark Shepard.
"Price-Linked Subsidies and Imperfect Competition in Health Insurance."
American Economic Journal: Economic Policy,
Insurance; Insurance Companies; Actuarial Studies
State and Local Government: Health; Education; Welfare; Public Pensions
Health Insurance, Public and Private
Health: Government Policy; Regulation; Public Health