Reducing Medical Costs of Health Insurance: The COVID-19 Stress Testing and Portfolio Effects

Abstract

Reducing medical costs is one of the three strategic aims of U.S. health care reform. This research quantifies potential expense reductions of U.S. health insurers and examines portfolio effects on expenses of differential health insurance mixes. We use the coronavirus disease 2019 (COVID-19) pandemic as a natural stress test for potential savings in medical services. We employ a two-stage residual inclusion generalized linear model and uncover differential expense reductions for four major health insurance markets: individual, group, Medicaid managed care, and Medicare Advantage. Our results could serve as a benchmark for reducing medical costs through redesigning insurance coverages following the most effective group insurance model. The results also provide policy implications on restructuring health insurance markets to increase efficiency. We empirically examine mutual impacts among major health insurance markets, and document explicitly three optimal health insurance portfolios in reducing expenses of health care: Medicaid managed care and individual plans, exclusively group plans, and Medicaid managed care and Medicare Advantage plans.