Quality Disclosure and Medicare Advantage Star Ratings

Ian McCarthy | Emory University

Outline for Today

  1. Quality Disclosure in Economics
  2. Background on MA Star Ratings
  3. Quality Disclosure and Plan Choice

Quality Disclosure

Hidden quality

  • Many goods have unobserved quality (e.g., used cars, hospitals, schools, mutual funds)
  • Asymmetric information implies potential adverse selection and market shrinkage
  • Quality disclosure tools: ratings, report cards, warranties, online reviews, certifications

Lemons logic

  • Sellers know quality; buyers only know the distribution of quality
  • Buyers pay price based on expected quality of sellers who accept a given price
  • With lower prices, high-quality sellers exit, expected quality falls, prices decline further
  • High-quality firms cannot sufficiently relay information on quality, so only low-quality “lemons” may remain

Voluntary disclosure and “unraveling”

  • Assume each seller can credibly disclose their own quality at low cost
  • If a good-quality seller stays silent, buyers suspect they’re like the worst silent type
  • Slightly better types want to separate by disclosing
  • Result: almost all types disclose; silence = bad news

Why full unraveling may fail

  • Disclosure is costly (data collection, audits, risk adjustment)
  • Information is noisy or complex; buyers may not understand it
  • Quality is multi-dimensional; firms highlight strong metrics, hide weak ones
  • Outcome: partial disclosure and strategic framing instead of full unraveling

Evidence from report cards

  • Cardiac surgery and hospital report cards:
    • Higher-rated providers often gain volume but may avoid sicker patients or focus on scored outcomes
  • Restaurant hygiene grades:
    • Public scores push restaurants to improve measured cleanliness and reduce violations
  • Overall: disclosure changes both demand (patient choice) and supply (quality effort and selection)

Policy lessons

  • Well-designed disclosure can:
    • Reduce adverse selection and reward high quality
    • Strengthen competition on performance, not just price or brand
  • Poorly designed disclosure can:
    • Encourage cream-skimming and metric gaming
  • Key design choices: which outcomes, how risk-adjusted, and how information is presented to users

Medicare Advantage Quality Ratings

Overview

  • Initial MA Star Ratings (2007)
  • Overall rating introduced in 2009
  • Complicated formula…
  • key point: ratings from several domains are averaged and then rounded
  • More details available here

Role of Quality Ratings

  • Potentially affect plan choice
  • Quality bonus program in 2012
    • Demonstration program at first (2012 through 2015)
    • ACA quality bonus payments begin 2015

Details of QBP

Eligible plans may receive two bonuses:

  1. Benchmark bonus: Increased benchmark payment of up to 5%
  2. Rebate bonus: Share of bid-benchmark differential going back to insurer (from 50% up to 70%)
  • Applied to plans with 3-stars and above from 2012-2015 (demonstration period)
  • Applied to plans with 4-stars and above beginning 2015

Some good primers

Quality Ratings and Plan Choice

Quality Ratings as Information Disclosure

  • Health insurance is a complicated product with many dimensions
  • Strong empirical evidence of “bad” choices in health insurance
  • Quality disclosure might help consumers make better choices

Disclosure versus Quality

  • We are interested in the effects of disclosure, not just quality ratings themselves
  • Correlation between ratings and enrollments will combine the disclosure effect as well as the “higher quality” effect
  • Our RD design will exploit differential reporting but for otherwise very similiar underlying quality