Capturing and harvesting in Medicare Advantage plan design

Abstract

Abstract Consumers in health insurance markets have inertia stemming from the desire to maintain relationships with providers and other frictions involved in switching plans. In other markets that feature inertia, suppliers respond with pricing strategies that vary by market share: lowering markups to capture consumers when market shares are low and raising markups to harvest profits once market share has been established. I tested for this behavior in the Medicare Advantage (MA) market by examining how MA plan sponsors changed the financial terms of their plans in response to changes in market share from 2007 to 2021 using a first-difference model with fixed effects. I found evidence that plans increase premiums, copays, and out-of-pocket limits when market shares increase. The results imply that for every 1% increase in market share, plan sponsors subsequently increase out-of-pocket costs by 1% in the following year.