Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap
62 Pages Posted: 27 Dec 2013 Last revised: 6 Oct 2017
Date Written: October 5, 2017
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: Suggested Citation