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

Marika Cabral and Neale Mahoney

American Economic Journal: Applied Economics, 2019, vol. 11, issue 2, 37-73

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 percent. We calculate that a 15 percent tax on Medigap premiums generates savings of $12.9 billion annually with a standard error of $4.9 billion.

JEL-codes: G22 H24 H51 I13 J14 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/app.20160350
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Citations: View citations in EconPapers (10)

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