| Dramatic changes in payment rates within the U.S. Medicare managed care program, due to the Balanced Budget Act (BBA) of 1997, provide a natural experiment for investigating firm responses to regulatory determined prices. The first essay quantifies the effect of BBA payment rate changes on recent health plan exits. We construct a structural model of plan participation in the Medicare program and use semi-reduced form, sequential estimators to decompose plan decisions into three parts: commercial market participation, Medicare participation and county selection. The results indicate that all three decisions are highly elastic to changes in payment rates, but industry trends and regulations are also critical in explaining recent trends. Simulations suggest that increasing county payment rates will only partially reverse plan exits. The second essay extends the first essay to study whether Medicare profitability affects the plan level benefits and premium choice under a model with selection incentives. Estimation results of each premium and benefit choice separately imply that premiums are very sensitive to Medicare profitability, but benefit choices are generally driven by the characteristics of competing plans. Estimation on constructed generosity and selectivity indices for the plans also yield similar results, whereby the benefits set on average is more generous and less selective as the profitability and competition increases. The third essay examines whether there are any spillover effects of the Medicare payment rates on access to care in the commercial managed care market, where access is measured by plan availability and penetration as well as by the number of providers per beneficiary. The reduced form estimation results indicate that markets with high total Medicare managed care profits also have higher commercial plan availability and penetration. Counties where the payment rates have been adjusted to the floor rate due to BBA have experienced entry of commercial plans. The choice of provider contracts is not responsive to the changes in profitability, although higher commercial market competition seems to reduce the number of contracts per enrollee. There is a marginal positive effect of the BBA on the specialty care to primary care contract ratio. |
