Public Price Setting with Insurance: The case of Medicare policies for the outpatient market [Job market paper]

In this paper, I show that public health payment systems can achieve greater efficiencies by jointly optimizing reimbursement rates for healthcare service providers and coinsurance rates for insured consumers. Using large datasets on Medicare claims and providers’ financials, I find that current Medicare reimbursement rates are significantly above marginal costs for both hospital outpatient departments (HOPDs) and ambulatory surgery centers (ASCs), and that ASCs offer equal or higher net value than HOPDs for common procedure groups. I develop a theoretical model to characterize the Medicare optimal reimbursement rates and coinsurance rates to demonstrate that reimbursement rates should optimally be set at providers’ marginal costs and coinsurance rates should be higher for HOPDs than for ASCs. Counterfactual analyses suggest that moving from current practice to the proposed optimal policy would reduce Medicare spending by 15-23%, whilst simultaneously increasing the social surplus from insurance coverage by 3-6%. In contrast, if the coinsurance rates for HOPDs and ASCs are constrained to be the same across provider types as of the current Medicare policy, more limited welfare improvements are still possible by increasing reimbursements rates for HOPDs to incentivize greater sorting into ASCs. Under such scenarios, I estimate an increase in social surplus of 3-6% and Medicare savings of 9-15% instead. Lastly, I show that Medicare’s recent policy change which decreased HOPDs’ reimbursement rates to ASCs’ rates whilst keeping the coinsurance rates the same resulted in negative changes in social surplus.

Work in progress

“Impacts of Medicare’s Hospital Value Based Purchasing program on hospital quality”, 2017 “Impacts of CalPERS’ reference pricing program on patients’ choice and providers’ pricing strategies”, 2019 

Stata commands

MTEBINARY: Stata module to compute Marginal Treatment Effects (MTE) With a Binary Instrument” (co-authored with Amanda Kowalski and Ljubica Ristovska), 2016

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