Paying for Quality: Coordinated Subsidy and Scoring Design in Medicare Advantage

With Sebastian Fleitas

Where large information asymmetries exist about service or product quality, regulators play a central role in monitoring and stimulating its production. In education, financial, and healthcare markets, regulators engage in a combination of pecuniary and informational incentives to discipline firms and correct informational frictions. Using extensive variation in quality regulation in Medicare Advantage, we study the complementarities between quality disclosure policies (e.g., star ratings) and quality investment subsidies. We develop a dynamic model of the market and evaluate the impact of these different policies on competition, consumer choice, and firms' incentives to invest. We solve for the optimal policy, highlighting how subsidies and information should be jointly designed and the losses from failing to account for their interactions.