This paper examines a public option competing alongside private insurers in Medicare Part D. We estimate a random coefficient demand system and oligopoly supply-side model with endogenous premium subsidies and risk adjustment payments. If the public option does not affect health risk sorting, counterfactual results show modest competitive benefits. However, increased subsidy payments eliminate welfare gains regardless of the public option's cost position. If the public option adversely selects -- facilitating insurers' ability to cream-skim favorable risk -- the risk adjustment mechanism creates a downward pricing distortion, amplifying competitive benefits. Despite greater selection, total surplus may increase, but the division favors insurers.
MILLER, Daniel P. and YEO, Jungwon.
The consequences of a public health insurance option: Evidence from Medicare Part D prescription drug markets. (2013). 1-54. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1270
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