The Effects of Contract Cancellation on Health Insurance Generosity in Medicare Advantage

Policymakers increasingly rely on competition between insurers to reduce costs and improve benefits.  This project analyzes how changes in competition among health insurers in Medicare Advantage (MA) affect the generosity of cost-sharing and covered benefits. To address the endogenous relationship between competition and benefits, I identify a natural experiment in which many insurers cancelled all plans of a certain type following a national change in Medicare policy.  Specifically, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) required private fee-for-service plans (PFFS) to form networks.  Rather than meet this requirement, 19 insurers cancelled all their PFFS contracts and exited the PFFS market nationally.  Changes in competition caused by these cancellations are plausibly unrelated to variation in local market conditions, as these insurers cancelled all PFFS plans rather than selectively exiting less profitable markets.

Treating the cancellation of these plans as a shock to competition, I test for a relationship between the size of the shock and changes in benefit generosity. Plan generosity is measured using expected beneficiary out-of-pocket costs (OOPC), which are calculated on behalf of Medicare as a summary measure of generosity. These measures are constructed by applying each plan’s cost sharing rules to a fixed basket of consumption for a representative Medicare cohort, and are, by construction, invariant to selection and moral hazard.

Preliminary results indicate that contract cancellation is associated with an overall increase in cost-sharing (reduction in generosity).  For a plan in the average county in my sample, expected beneficiary out-of-pocket costs (OOPC), or the portion of cost-sharing a beneficiary is responsible for, increased by about $13 per-member-per-month. Markets where cancelled contracts had larger market shares experienced greater increases in expected OOPC, with the top decile experiencing increases in OOPC of $55 per-member-per-month.  Future analysis will test for effects of exit on specific benefits and assess competing explanations for the observed response.