Government programs are often offered on an optional basis to market participants. We explore the economics of such voluntary regulation in the context of a Medicare payment reform, in which one medical provider receives a single, predetermined payment for a sequence of related healthcare services, instead of separate service-specific payments. This "bundled payment" program was originally implemented as a 5-year randomized trial, with mandatory participation by hospitals assigned to the new payment model; however, after two years, participation was made voluntary for half of these hospitals. Using detailed claim-level data, we document that voluntary participation is more likely for hospitals that can increase revenue without changing behavior ("selection on levels") and for hospitals that had large changes in behavior when participation was mandatory ("selection on slopes"). To assess outcomes under counterfactual regimes, we estimate a stylized model of responsiveness to and selection into the program. We find that the current voluntary regime generates inefficient transfers to hospitals, and that alternative (feasible) designs could reduce these inefficient transfers and raise welfare. Our analysis highlights key design elements to consider under voluntary regulation.

We estimate the economic surplus created by the Medicare Advantage program under its reformed competitive bidding rules. We use data on the universe of Medicare beneficiaries and develop a model of plan bidding that accounts for both market power and risk selection. We estimate that the Medicare Advantage program generates substantial surplus to participants (of $217 per enrollee-month), but that approximately two-thirds of this surplus is captured by insurers. We use the model to evaluate the impact of possible program changes, including changes that could increase competition and lead to lower profits and higher consumer surplus without raising taxpayer costs.