Ying Fan, University of Michigan

"Subsidy Design, Price Setting, and Quality Provision: A Study of Medicare Advantage"

Abstract

This paper studies how the design of quality-linked subsidies shapes firm behavior in both quality choices and pricing decisions. We examine a major reform in Medicare Advantage that links subsidies to quality through two distinct policy parameters. We develop and estimate a structural model of demand and firm behavior to evaluate the reform, decompose its effects, and compare alternative quality-linked subsidy designs. A central finding is that a subsidy design that links product quality to both the subsidy level and the pass-through from firm prices to subsidized consumer prices can simultaneously raise quality and lower prices.

Contact person: Anders Munk-Nielsen