Can Health Insurance Competition Work? Evidence from Medicare Advantage
We estimate the economic surplus created by Medicare Advantage under its reformed
competitive bidding rules. We use data on the universe of Medicare beneficiaries, and develop a
model of plan bidding that accounts for both market power and risk selection. We find that private
plans have costs around 12% below fee-for-service costs, and generate around $50 in surplus on
average per enrollee-month, after accounting for the disutility due to enrollees having more limited
choice of providers. Taxpayers provide a large additional subsidy, and insurers capture most of the
private gains. We use the model to evaluate possible program changes.