Performance Pay in Insurance Markets: Evidence from Medicare

Michele Fioretti (1) , Hongming Wang (2)

1 ECON - Département d'économie (Sciences Po)
2 Hitotsubashi University

Public procurement bodies increasingly resort to pay-for-performance contracts to promote efficient spending. We show that firm responses to pay-for-performance can widen the inequality in accessing social services. Focusing on the quality bonus payment initiative in Medicare Advantage, we find that higher quality-rated insurers responded to bonus payments by selecting healthier enrollees with premium differences across counties. Selection is profitable because the quality rating fails to adjust for differences in enrollee health. Selection inflated the bonus payments and shifted the supply of high-rated insurance to the healthiest counties, reducing access to lower-priced, higher-rated insurance in the riskiest counties.

Keywords: Pay-for-Performance; Medicare Advantage; Risk Selection; Quality Ratings; Health Insurance Access

Domains: Economics and Finance

Michele Fioretti, Hongming Wang. Performance Pay in Insurance Markets: Evidence from Medicare. 2021. ⟨hal-03386584⟩