Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap
University of Texas at Austin; National Bureau of Economic Research (NBER)
University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)
November 25, 2014
Most health insurance policies use cost-sharing to reduce excess utilization. The purchase of supplemental insurance can blunt the impact of this cost-sharing, potentially increasing utilization and exerting a negative externality on the primary insurance provider. This paper estimates the effect of private Medigap supplemental insurance on public Medicare spending using Medigap premium discontinuities in local medical markets that span state boundaries. Using administrative data on the universe of Medicare beneficiaries, we estimate that Medigap increases an individual’s Medicare spending by 22.2%. We find that the take-up of Medigap is price sensitive with an estimated demand elasticity of -1.8. Using these estimates, we calculate that a 15% tax on Medigap premiums would generate combined tax revenue and cost savings of $12.9 billion annually. A Pigouvian tax would generate combined annual savings of $31.6 billion.
Number of Pages in PDF File: 61
Keywords: Medigap, Medicare, supplemental insurance, moral hazard, externality
JEL Classification: H51, I13, H23
Date posted: December 27, 2013 ; Last revised: December 4, 2014
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