Externalities and Benefit Design in Health Insurance

Amanda Starc*, Robert J. Town

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

12 Scopus citations


Insurance benefit design has important implications for consumer welfare. In this article, we model insurer behaviour in the Medicare prescription drug coverage market and show that strategic private insurer incentives impose a fiscal externality on the traditional Medicare program. We document that plans covering medical expenses have more generous drug coverage than plans that are only responsible for prescription drug spending, which translates into higher drug utilization by enrolees. The effect is driven by drugs that reduce medical expenditure and treat chronic conditions. Our equilibrium model of benefit design endogenizes plan characteristics and accounts for asymmetric information; the model estimates confirm that differential incentives to internalize medical care offsets can explain disparities across plans. Counterfactuals show that strategic insurer incentives are as important as asymmetric information in determining benefit design.

Original languageEnglish (US)
Pages (from-to)2827-2858
Number of pages32
JournalReview of Economic Studies
Issue number6
StatePublished - Nov 1 2020


  • Analysis of health care markets
  • I11

ASJC Scopus subject areas

  • Economics and Econometrics


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