Price Cap vs. Per-Unit Subsidies: Selection, Pricing, and Cross Subsidization
Ram Sewak Dubey, Maysam Rabbani, Rodrigo Pinto
TLDR
This paper evaluates FCC healthcare subsidy mechanisms, finding ad valorem reduces spending but consortiums inflate it via cross-subsidization.
Key contributions
- Evaluates FCC's Rural Health Care program subsidy mechanisms using administrative data.
- Finds the ad valorem mechanism significantly reduces program spending versus price caps.
- Shows consortium applications inflate spending due to cross-subsidization to ineligible members.
- Develops theoretical models and uses an extended two-way fixed effects framework.
Why it matters
This paper provides critical empirical evidence on the effectiveness of different subsidy mechanisms in the FCC's Rural Health Care program. It reveals how policy design choices, like allowing consortiums, can lead to unintended cost inflation through cross-subsidization.
Original Abstract
We evaluate subsidy mechanisms in the FCC's Rural Health Care program using administrative data covering the full population of participants. The original price-cap mechanism removes cost-containment incentives for health care providers. An ad valorem mechanism introduced in 2014 addresses this flaw by making providers bear 35% of costs. However, allowing consortium applications creates a new distortion: cross-subsidization from eligible to ineligible members. We develop theoretical models predicting these effects and estimate treatment effects using an extension of the two-way fixed effects framework with continuous treatments. We find that the ad valorem mechanism substantially reduces program spending relative to the price cap, while the consortium option significantly inflates it. Enforcement records and an inverted U-shaped relationship between cross-subsidization intensity and ineligible member share corroborate the findings.
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