Subsidy Design in Privately-Provided Social Insurance: Lessons from Medicare Part D

The efficiency of publicly-subsidized, privately-provisioned social insurance programs depends on the interaction between insurer behavior and public subsidies. We study this interaction within Medicare Part D Prescription Drug Plan (PDP) markets. Using a structural model of supply and demand, we find: consumers purchase too few and too socially-costly PDP plans; insurers price near marginal cost; the primary driver of welfare is the opportunity cost of government spending on other Medicare programs; and the current subsidization policy achieves a level of total welfare close to that obtained under an optimal in-kind subsidy, but is far from the social planner's first-best solution.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.