The Value of Coverage in the Medicare Advantage Insurance Market

This paper examines the impact of coverage on demand for health insurance in the Medicare Advantage (MA) insurance market. Estimating the effects of coverage on demand poses a challenge for researchers who must must consider both the hundreds of benefits that affect out-of-pocket costs (OOPC) to consumers, but also the endogeneity of coverage. These problems are addressed in a discrete choice demand model by employing a unique measure of OOPC that considers a consumer’s expected payments for a fixed bundle of health services and applying instrumental variable techniques to address potential endogneity bias. The results of the demand model show that OOPC have a significant effect on consumer surplus and that not instrumenting for OOPC results in a significant underestimate of the value of coverage.