Quality reporting, bonus payments and welfare in Medicare Advantage




Charbi, Alexandra Nikolaos

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When consumers are imperfectly informed about the quality of a product, market forces do not incentivize firms to provide the socially optimal level of quality. Imperfect information is a recognized and frequent market failure in the context of public health and has led to initiatives aimed at increasing consumers' access to information and at incentivizing firms to provide higher quality services. This study analyzes the welfare effects of quality disclosure and quality subsidies on the Medicare Advantage (MA) market. MA is a subsidized program that provides health insurance to the elderly and disabled population in the U.S. as an alternative to Traditional Medicare.

The study begins by introducing the institutional background of the market that provides a unique setup to analyze. On the demand side, consumers receive information on the quality of health insurance plans through a Star Rating System (SRS). On the supply side, higher-rated insurers receive a quality-linked subsidy through a Quality Bonus Program (QBP).

The second chapter provides evidence that consumers do not respond to the information they receive. The question then arises, ``Why is this happening?'' Is is because consumers are not aware of the SRS? Is it because consumers do not value the information they receive through the SRS? Or, is it because consumers do not care about the dimension of quality the SRS is informing them on? At the same time, star ratings increase over time. Simple density distribution graphs suggest that this increase is motivated by the financial incentives that QBP provides insurers with. Those two observations raise the question of what the relative impacts of the two policies together are on welfare.

The third chapter describes a survey I designed and conducted to answer the first set of questions regarding the demand side of the market-Do consumer know about the SRS? Do consumers value the information they receive? Do consumers about the dimension of quality the star ratings are informing them on?-Surveying Medicare-eligible individuals, I find that 80% of the population is unaware of the SRS. In the survey, I also conduct a conjoint analysis to elicit preferences for star ratings. I find that respondents who reported they were aware of the SRS place a monthly value of $25 on an extra star rating; slightly more than the ones who reported they were unaware.

The fourth chapter presents a structural equilibrium model of supply and demand that separately identifies and quantifies the relative impacts of each policy on welfare. The model also incorporates the survey results by flexibly allowing for different consumer types: those who are unaware and those who do not care about the SRS. I combine the survey stated preference with revealed preference choice data and estimate a Bayesian learning discrete choice model. On the supply side, insurers endogenously choose price and quality. My analysis shows that although both the SRS and the QBP lead to higher quality, welfare improvement is very small compared to the incurred costs. In particular, 75% of the expenditures spent on the QBP is not rationalized by any welfare improvement.

The final chapter concludes and states potential paths for future research.



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