Who Benefits when the Government Pays More?
Pass-Through in the Medicare Advantage Program
Governments contract with private firms to provide a wide range of services. While a large
body of previous work has estimated the effects of that contracting, surprisingly little has
investigated how those effects vary with the generosity of the contract. In this paper we examine
this issue in the Medicare Advantage (MA) program, through which the federal government
contracts with private insurers to coordinate and finance health care for 16 million Medicare
recipients. To do this, we exploit a substantial policy-induced increase in MA reimbursement
in metropolitan areas with a population of 250 thousand or more relative to MSAs below this
threshold. Our results demonstrate that the additional reimbursement leads more private firms
to enter this market and to an increase in the share of Medicare recipients enrolled in MA plans.
Our findings also reveal that about one-sixth of the additional reimbursement is passed through
to consumers in the form of better coverage. A somewhat larger share accrues to private insurers
in the form of higher profits and we find suggestive evidence of a large impact on advertising
expenditures. Our results have implications for a key feature of the Affordable Care Act that
will reduce reimbursement to MA plans by $156 billion from 2013 to 2022.