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

62 Pages Posted: 27 Dec 2013 Last revised: 6 Oct 2017

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)

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Date Written: October 5, 2017

Abstract

Most health insurance uses cost-sharing to reduce excess utilization. Supplemental insurance can blunt the impact of this cost-sharing, increasing utilization and exerting a negative externality on the primary insurer. 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 calculate that a 15% tax on Medigap premiums generates savings of $12.9 billion annually, with a standard error of $4.9 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 (October 5, 2017). 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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