Competitive Insurance Design in Medicare Part D

Abstract

Economic theory makes ambiguous predictions about the effect on product quality of competition, in markets with assymetric information. I present a model that expresses firm incentives to sort users based on product quality in such markets, and relate it to primitives of the distribution of consumer heterogeneity. I then use the model to analyze the effects of competition on the quality of insurance contracts offered in the US Medicare Part D market. Using exogenous variation from flu incidence to instrument firm exit, I find that increased competition reduces prices but also decreases product quality, leading to ambiguous welfare effects.