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

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  • Marika Cabral
  • Neale Mahoney

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.

Suggested Citation

  • Marika Cabral & Neale Mahoney, 2019. "Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap," American Economic Journal: Applied Economics, American Economic Association, vol. 11(2), pages 37-73, April.
  • Handle: RePEc:aea:aejapp:v:11:y:2019:i:2:p:37-73
    Note: DOI: 10.1257/app.20160350
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    References listed on IDEAS

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    1. Jeffrey Clemens & Joshua D. Gottlieb, 2014. "Do Physicians' Financial Incentives Affect Medical Treatment and Patient Health?," American Economic Review, American Economic Association, vol. 104(4), pages 1320-1349, April.
    2. David Card & Carlos Dobkin & Nicole Maestas, 2009. "Does Medicare Save Lives?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(2), pages 597-636.
    3. Amy Finkelstein & Matthew Gentzkow & Heidi Williams, 2016. "Sources of Geographic Variation in Health Care: Evidence From PatientMigration," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1681-1726.
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    Citations

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    Cited by:

    1. Erkmen G. Aslim & Murat C. Mungan & Han Yu, 2024. "A welfare analysis of Medicaid and recidivism," Health Economics, John Wiley & Sons, Ltd., vol. 33(11), pages 2463-2507, November.
    2. Sloggy, Matthew R. & Hrozencik, R. Aaron & Manning, Dale T. & Goemans, Chris G. & Claassen, Roger L., 2025. "Insurance and extraction incentives in a common pool resource: Evidence from groundwater use in the high plains," Journal of Environmental Economics and Management, Elsevier, vol. 130(C).
    3. Marika Cabral & Marcus Dillender, 2024. "The Impact of Benefit Generosity on Workers' Compensation Claims: Evidence and Implications," American Economic Journal: Applied Economics, American Economic Association, vol. 16(3), pages 436-481, July.
    4. Guo, Audrey & Zhang, Jonathan, 2019. "What to expect when you are expecting: Are health care consumers forward-looking?," Journal of Health Economics, Elsevier, vol. 67(C).
    5. Elizabeth Baldwin & Jonas Fooken & David Rowell, 2025. "Private health insurance and health in a healthcare system with comprehensive public insurance," Empirical Economics, Springer, vol. 68(4), pages 2009-2040, April.
    6. Keith Marzilli Ericson & Philipp Kircher & Johannes Spinnewijn & Amanda Starc, 2021. "Inferring Risk Perceptions and Preferences Using Choice from Insurance Menus: Theory and Evidence," The Economic Journal, Royal Economic Society, vol. 131(634), pages 713-744.
    7. Nathaniel Hendren & Camille Landais & Johannes Spinnewijn, 2021. "Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 457-486, August.
    8. Curto, Vilsa E., 2023. "Pricing regulations in individual health insurance: Evidence from Medigap," Journal of Health Economics, Elsevier, vol. 91(C).
    9. Kanghyock Koh & Sungchul Park, 2025. "Effects of the Medicaid coverage cliff on low‐income elderly Medicare beneficiaries," Health Economics, John Wiley & Sons, Ltd., vol. 34(1), pages 105-153, January.
    10. Yuanyuan Deng & Hugo Benítez-Silva, 2021. "An Empirical Model of Medicare Costs: The Role of Health Insurance, Employment, and Delays in Medicare Enrollment," Econometrics, MDPI, vol. 9(2), pages 1-32, June.
    11. Shen, Menghan & He, Wen & Li, Linyan, 2020. "Incentives to use primary care and their impact on healthcare utilization: Evidence using a public health insurance dataset in China," Social Science & Medicine, Elsevier, vol. 255(C).

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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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