NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Marika Cabral, Neale Mahoney

NBER Working Paper No. 19787
Issued in January 2014
NBER Program(s):   AG   HC   HE   PE

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. A Pigouvian tax generates annual savings of $31.6 billion.

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This paper was revised on December 23, 2014

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Document Object Identifier (DOI): 10.3386/w19787

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