Estimating Equilibrium in Health Insurance Exchanges: Price Competition and Subsidy Design Under the ACA

Abstract

To design premium subsidies in a health insurance market it is necessary to estimate consumer demand and study how different subsidy schemes affect insurers’ incentives. Combining data from the Californian ACA marketplace with a model of insurance demand and insurers’ competition, I identify and estimate demand and cost primitives, and assess equilibrium outcomes under alternative subsidy designs. I find that vouchers are less distortionary than subsidies calculated from market premiums, and — given age-heterogeneity in demand and cost — tailoring subsidies to age leads to an equilibrium where all buyers are better off and per-person public spending is lower.