Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap

61 Pages Posted: 27 Dec 2013 Last revised: 4 Dec 2014

Marika Cabral

University of Texas at Austin; National Bureau of Economic Research (NBER)

Neale Mahoney

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 25, 2014

Abstract

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.

Keywords: Medigap, Medicare, supplemental insurance, moral hazard, externality

JEL Classification: H51, I13, H23

Suggested Citation

Cabral, Marika and Mahoney, Neale, Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap (November 25, 2014). Available at SSRN: https://ssrn.com/abstract=2372163 or http://dx.doi.org/10.2139/ssrn.2372163

Marika Cabral

University of Texas at Austin ( email )

Department of Economics
2225 Speedway, BRB 1.116, C3100
Austin, TX 78712
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Neale Mahoney (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Ave
Chicago, IL 60637
United States
773.702.9278 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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