Performance Pay in Insurance Markets: Evidence from Medicare

Abstract

Public procurement bodies increasingly resort to pay-for-performance contracts to promote efficient spending. We show that firm responses to pay-for-performance can widen the inequality in accessing social services. Focusing on the quality bonus payment initiative in Medicare Advantage, we find that higher quality-rated insurers responded to bonus payments by selecting healthier enrollees with premium differences across counties. Selection is profitable because the quality rating fails to adjust for differences in enrollee health. Selection inflated the bonus payments and shifted the supply of highrated insurance to the healthiest counties, reducing access to lower-priced, higher-rated insurance in the riskiest counties.

Caring or Pretending to Care? Social Impact, Firms’ Objectives, and Welfare

“…In particular, subsidies could be linked to the results of the yearly third-party audit of social impact that is currently required of BC firms, rather than a firm's legal status. However, a body of theoretical (e.g., Holmstrom and Milgrom, 1991) and empirical evidence (e.g., Fioretti and Wang, 2022) demonstrates that pecuniary incentives can distort effort and that firms can game pay-for-performance 35 The number of firms with social missions is undoubtedly much larger than the number of BC incorporated firms, which is also likely underestimated. Berrey (2018) mentions several obstacles to obtaining BC data, as databases are decentralized across U.S. states, and their records are often incomplete (e.g., many states do not record the social mission statements in the incorporation articles).…”

“…7 Although workers positively respond to intrinsic incentives (e.g., Kolstad, 2013), extrinsic incentives can reduce the prosocial efforts of motivated agents if they limit the signaling value of their prosocial actions (e.g., Ariely et al, 2009, Cassar and Meier, 2018, Cassar, 2019. However, how firms respond to these incentives is still an open question, which may depend on the interaction between decision-makers' motivations (e.g., Levit, 2019, Fioretti et al, 2021 and a firm's governance (e.g., Glaeser, 2002, Besley andGhatak, 2005).…”

“…Kotsantonis and Serafeim (2019) suggest that ESG indices are biased and inconsistently measured. In this case pay-for-performance contracts can incentivize firms to game such indices (e.g.,Fioretti and Wang, 2022).…”