Price Variation in Markets with Homogeneous Goods: The Case of Medigap
AbstractAbout one-third of elderly Americans age 65 and older supplements their Medicare health insurance in a private insurance market known as the ÒMedigapÓ market. Prices for Medigap policies vary widely, despite the fact that regulations enacted in 1992 standardized all Medigap policies, thereby creating a market with homogenous insurance products. Economic theory suggests that consumer search costs can lead to a non-degenerate price distribution within a market for otherwise homogenous goods. Using a structural model of equilibrium search costs first posed by Carlson and McAfee (1983), the authors find that nearly all consumers face search costs high enough to prevent them from searching until they find the lowest priced Medigap policy. They estimate average search costs to be $249, substantially higher than has been found in other markets, but plausible given the complex nature of the Medigap market and its elderly consumer population. The implied aggregate welfare loss is approximately $798 million or $484 per policyholder.
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Bibliographic InfoPaper provided by RAND Corporation Publications Department in its series Working Papers with number 504.
Length: 52 pages
Date of creation: Jul 2006
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More information through EDIRC
health insurance; medigap; elderly;
Find related papers by JEL classification:
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-02 (All new papers)
- NEP-COM-2007-09-02 (Industrial Competition)
- NEP-IAS-2007-09-02 (Insurance Economics)
- NEP-MIC-2007-09-02 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Amy Finkelstein & Robin McKnight, 2005. "What Did Medicare Do (And Was It Worth It)?," NBER Working Papers 11609, National Bureau of Economic Research, Inc.
- David Card & Carlos Dobkin & Nicole Maestas, 2004.
"The Impact of Nearly Universal Insurance Coverage on Health Care Utilization and Health: Evidence from Medicare,"
NBER Working Papers
10365, National Bureau of Economic Research, Inc.
- David Card & Carlos Dobkin & Nicole Maestas, 2004. "The Impact of Nearly Universal Insurance Coverage on Health Care Utilization and Health: Evidence from Medicare," Working Papers 197, RAND Corporation Publications Department.
- Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-38, April.
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