Jose Ignacio Cuesta, Paper Abstract, April 10, 2024

Managed Competition vs. Public Procurement in Individual Health Insurance, with Pietro

Managed competition is a widely adopted regulatory setting in the context of government-sponsored health insurance. A key justification for this design is the ability of consumers to choose among plans to foster competition. We explore theoretically and empirically an alternative market design akin to public procurement, in which insurers bid to become the sole provider in a market. While this design mechanically offers less variety to consumers, it may also intensify competition as well as limit risk selection across plans. We set up an empirical horse race between these alternatives using data on choices, costs, and detailed information on provider networks from California's ACA marketplace for 2014--2017. We find that for a class of incentive-compatible scoring auctions, the gains from stronger competition and lower risk skimming incentives between plans are larger than the losses due to less plan variety. These gains are stronger in more concentrated markets, when using scoring mechanisms that put weight on plan quality, and for individuals with a lower propensity to purchase coverage. A scoring rule that aligns with consumer preferences for quality and premiums increases average consumer surplus by $113/year and enrollment by 0.4 percentage points. These are approximately a third of the gains of moving from oligopoly pricing to a perfectly competitive benchmark.