Medicare Reform: Estimation of the Impacts of Premium Support Systems

Medicare reform plans advocate reducing the capitation levels or determining these endogenously as a function of the premium bids, for example, the lowest, the second-lowest or a weighted average of the bids. Based on a price competition model tailored toward this market, and actual 2010 county-by county data, we estimate the impact such reforms would have on the plans’s market shares, equilibrium premia, the government’s and the beneficiaries’ costs. We employ two methodologies to derive the model parameters. The predicted impacts are remarkably consistent and reveal, for example, that government costs could be reduced by 16.5%-21%.