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Faculty Research: Dr. Cabral on Medicare Costs

Posted: January 19, 2014
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Faculty research:  Medigap coverage leads to large increases in Medicare costs

New research by assistant professor Marika Cabral finds that supplemental “Medigap” plans significantly increases the costs associated with Medicare.  The study, co-authored with University of Chicago economist Neale Mahoney, was released in January 2014 as part of the National Bureau of Economic Research working paper series.

Individuals purchase supplemental Medigap coverage from a private insurer to significantly reduce or eliminate their out-of-pocket expenses for Medicare services.  The increase in health-care utilization leads to higher costs associated with Medicare.  In order to precisely estimate the demand for Medigap coverage, Cabral and Mahoney do a detailed analysis of Medigap-plan demand by focusing upon state variation in Medigap prices.  For example, comparing Vermont and New York, the study points out Medigap premiums can vary from $1,058 on the Vermont side of the border to $1,504 on the New York side.

The study finds extremely large effects of Medigap on Medicare costs.  Individuals with Medigap coverage are estimated to increase their Medicare spending by over 20%.  The authors estimate that a 15% tax on Medigap premiums would lead to combined tax-revenue and cost-savings of nearly $13 billion annually.

The study has already received national attention, including media coverage in both Kaiser Health News and National Public Radio.  In the Kaiser Health News article, MIT economist Jonathan Gruber calls it the “best study to date in terms of finding price variation between otherwise similar plans. … [T]his price variation drives both use of Medigap plans and associated spending on Medicare.”  The complete study by Cabral and Mahoney, entitled “Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap,” can be found through this link.

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