Sources of Advantageous Selection: Evidence from the Medigap Insurance Market

62 Pages Posted: 26 May 2006

See all articles by Hanming Fang

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Michael P. Keane

Arizona State University (ASU) - Economics Department; University of Technology, Sydney (Visiting July 2006-Present)

Dan Silverman

University of Michigan at Ann Arbor - Economics Department; National Bureau of Economic Research (NBER)

Date Written: May 2006

Abstract

We provide strong evidence of advantageous selection in the Medigap insurance market, and analyze its sources. Using Medicare Current Beneficiary Survey (MCBS) data, we find that, conditional on controls for the price of Medigap, medical expenditures for senior citizens with Medigap coverage are, on average, about $4,000 less than for those without. But, if we condition on health, expenditures for seniors on Medigap are about $2,000 more. These two findings can only be reconciled if those with less health expenditure risk are more likely to purchase Medigap, implying advantageous selection. By combining the MCBS and the Health and Retirement Study (HRS), we investigate the sources of this advantageous selection. These include income, education, longevity expectations and financial planing horizons, as well as cognitive ability. Once we condition on all these factors, seniors with higher expected medical expenditure are indeed more likely to purchase Medigap. Surprisingly, risk preferences do not appear to be a source of advantageous selection. But cognitive ability emerges as a particularly important factor, consistent with a view that many senior citizens have difficulty understanding Medicare and Medigap rules.

Keywords: asymmetric information, medicare, medigap, adverse selection, advantageous

JEL Classification: D82, G22, I11

Suggested Citation

Fang, Hanming and Keane, Michael P. and Silverman, Dan, Sources of Advantageous Selection: Evidence from the Medigap Insurance Market (May 2006). Yale Economic Applications and Policy Discussion Paper No. 17. Available at SSRN: https://ssrn.com/abstract=904642

Hanming Fang (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael P. Keane

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

University of Technology, Sydney (Visiting July 2006-Present)

PO Box 123 Broadway
NSW 2007
Australia
480-965-1053 (Phone)
480-965-0748 (Fax)

Dan Silverman

University of Michigan at Ann Arbor - Economics Department ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2447 (Phone)
734-764-2769 (Fax)

HOME PAGE: http://www.econ.lsa.umich.edu/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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