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Speaker: Anran Li
Title: Consumer Subsidy versus Reinsurance Subsidy under Financial Frictions: Evidence from the Individual Health Insurance Market (joint with Paul Kim)

Abstract: This paper studies the efficiency of reinsurance subsidies to insurers compared to premium subsidies to consumers in the health insurance market. Reinsurance subsidies reimburse insurers a portion of high-cost claims, which alleviates insurers' financial costs of maintaining adequate capital. We first develop a theoretical framework where insurers face financial frictions in a market with adverse selection. The model predicts that the pass-through of reinsurance subsidies can be greater than one with financial frictions. The relative effectiveness of reinsurance and premium subsidies depends on the relative magnitude of distortions from financial frictions and adverse selection. We then show evidence of insurers internalizing financial frictions. Health insurers purchase private reinsurance despite high markups. In response to public reinsurance subsidies, insurers purchase less private reinsurance and lower health insurance premiums, with an estimated pass-through of 1.3. We finally estimate an empirical model where insurers choose premiums and private reinsurance purchases using data from Colorado. Model estimates reveal reinsurance subsidies are more efficient than premium subsidies under current market conditions. Under a fixed government budget, reallocating 8% premium subsidies to reimburse insurers 60% high-cost claims increases consumer welfare by $23. 

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