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

Marika Cabral and Neale Mahoney

No 19787, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H2 I13 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-hea, nep-ias, nep-pbe and nep-pub
Note: AG EH PE
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Citations: View citations in EconPapers (10)

Published as Marika Cabral & Neale Mahoney, 2019. "Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap," American Economic Journal: Applied Economics, vol 11(2), pages 37-73.

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