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 17 million Medicare recipients. To do this, we exploit a substantial policy-induced increase in MA reimbursement in metropolitan areas with a population of 250,000 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-eighth 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. •In this paper we examine the effect of contract generosity in the Medicare Advantage program, which provides coverage for 17 million Medicare recipients.•We exploit policy-induced reimbursement variation, which results in higher plan payments in metro areas of over 250,000.•Our results demonstrate that the additional reimbursement leads to entry of additional insurers and to higher MA enrollment levels.•Our findings also reveal that about one-eighth of the additional reimbursement is passed through to consumers.•A somewhat larger share accrues to private insurers, in the form of higher profits and increased advertising expenditures.