Government Contract Generosity and Its Effect on Firm Behavior: Evidence from the Medicare Advantage Program

For twenty-five years, Medicare recipients have been able to opt out of traditional Medicare and into privately managed plans.  We examine the incidence of federal spending in this market using exogenous, discontinuous changes in reimbursement generosity.  We find that imperfectly competitive insurers enter the market in response to changes in generosity but, critically, that the majority of gains do not accrue to consumers.  Premiums, increased plan generosity, and rebates to consumers account for only a small fraction of increased plan payments; we can rule out pass-through of greater than one-thurd.  We also examine non-pecuniary outcomes including plan quality and enrollee composition, and do not find any improvements resulting from increased reimbursement.