Working Papers

“Risk Corridors in Medicare Part D: Risk Sharing or Profit Limiting Mechanism?” [PDF]

Publicly-funded and privately-provided health insurance programs in the U.S. are regulated to ensure a competitive marketplace. However, private firms can strategically respond to government rules and regulations that may lead to market outcomes away from the government’s intended goals. I study insurers’ strategic responses to the interaction of two regulations in Medicare Part D: profit margin regulation and risk corridors (a risk sharing policy). The government utilizes insurers’ self-reported cost estimates to implement both regulations. This creates a trade-off for firms; they can lower their cost report to reduce risk exposure or increase their cost report to charge higher prices. To quantify the effects of insurers’ strategic responses, I estimate a structural model in which insurers are risk averse and can strategically misreport their costs. I find that insurers over-report their cost estimates by 7.5%, leading to 10% higher prices for consumers; however, by over-reporting their cost estimates, insurers are expected to pay back the government 2% of premium revenue in risk corridor payments. Thus, risk corridors limit ex-post profits more than serving as a risk sharing mechanism. I propose an alternative linear risk sharing rule to replace the existing risk corridors, which increases total surplus by 11% while maintaining insurers’ risk exposure.

“Insurer Risk and Public Risk-Sharing:Quantifying the Value of Reinsurance” (with Anran Li) [PDF]  {Under Review}

We study the role of public risk-sharing in markets where firms face substantial cost uncertainty,focusing on public reinsurance in health insurance. We develop a model where insurers internalize cost uncertainty through risk charges that raise effective marginal costs, and create a role for reinsurance. Public reinsurance lowers both expected costs and cost volatility, particularly for smaller insurers, reducing prices and enhancing competition. Using an event study of staggered state-level reinsurance programs, we show that public reinsurance leads insurers to lower prices and private reinsurance purchases, benefiting financially constrained insurers the most. Structural estimates indicate that risk charges account for a substantial share of the premium-cost wedge, and highlight public reinsurance’s comparative advantageover premium subsidies by providing risk protection and enhancing competition. Our results underscore the importance of accounting for firms’ risk exposure in policy design and provide a general framework for understanding public risk-sharing policies

“Incentive Structures and Borrower Composition in the Paycheck Protection Program” (with David Stillerman) [PDF]

We study the design of the Paycheck Protection Program (PPP), a loan-forgiveness scheme that is implemented through private lenders and assists small businesses in keeping their employees on payroll during the COVID-19 pandemic. We develop a model of PPP lending to capture the government’s tradeoff between inducing bank participation and targeting funds for use on payroll. Using the model, we establish that both increasing subsidies and relaxing forgiveness standards are effective in expanding credit access to borrowers seeking smaller loans. However, their efficacy in targeting (i.e., providing funds to businesses who will use them on payroll) depends on the correlation between loan amounts and borrowers’ return to payroll. We test the implications of the model using policy variation from the PPP Flexibility Act, legislation that relaxed forgiveness standards. Consistent with the predictions of the model, the average loan amount falls by between 6 and 7% in the period following the policy change. Furthermore, marginal borrowers are more likely than inframarginal borrowers to use funds for payroll, so making forgiveness more accessible increases the average share of funds used for those purposes.

Work in Progress 

“Do Insurers Exhibit Moral Hazard?: Evidence from Public Reinsurance Programs” (with Anran Li)   

“Do Consumers Benefit from Having More Choice?: Evidence from Michigan Auto Insurance Market Reform”