Subsidizing Inequality: Performance Pay and Risk Selection in Medicare
Sciences Po Economics Discussion Papers
Paris : Département d'économie de Sciences Po
Sciences Po Economics Discussion Papers : 2019-15
Pay-for-Performance, Quality Bonus Payment Demonstration, Medicare Advantage, Risk Selection, Supply-Side Selection, Quality Ratings, Health Inequality
Pay-for-performance is commonly employed to improve the quality of social services contracted out to firms. We show that insurer responses to pay-for-performance can widen the inequality in accessing social services. Focusing on the U.S. Medicare Advantage market, we find that high-quality insurance contracts responded to quality-linked payments by selecting healthier enrollees with premium differences across counties. The selection is profitable because the quality rating fails to adjust for pre-existing health differences of enrollees. As a result, quality improved mostly due to selection, and the supply of high-quality insurance shifted to the healthiest counties. Revising the quality rating could prevent these unintended consequences.