essays in public finance and industrial organization a dissertation ...

CHAPTER 3. MEDIGAP 119
be of interest more generally. Settings with private supplemental coverage and public
primary insurance are widespread. For example, in France more than 92 percent of
the population holds private supplemental insurance to protect against the substantial
coinsurance payments (10 to 40 percent) of the universal public health insurance
system, and private supplemental policies that top up public health insurance benefits
are popular in Austria, Belgium, and Denmark as well. 2 Yet despite economists’
interest in the interaction of public and private insurance as demonstrated by the
large literature on crowd-out (cf. ??), there is relatively little work on the fiscal
externalities associated with jointly held private and public insurance. 3
At a conceptual level, supplemental Medigap coverage could impose a negative or
positive fiscal externality on Medicare. Because Medigap policies reduce the marginal
price for care, it is straightforward to see that overall utilization and Medicare costs
could increase. Medigap policies could alternatively decrease costs if, for example,
reduced cost-sharing improved treatment adherence, reducing the risk of hospitaliza-
tion. In the context of Medicare supplemental insurance available to retired California
state employees, ? find there is a significant positive cost externality of supplemental
insurance, what they call an “offset effect,” for those that are chronically ill. 4 For
the overall retiree population, however, the externality is negative with supplemental
insurance increasing Medicare costs.
The conventional wisdom is that supplemental insurance on net imposes a negative
fiscal externality on Medicare, although the magnitude of the effect is contended. The
central estimate, used by the Congressional Budget Office (CBO) for official budget
2 Statistics are from the following sources: ? “Selected European Countries Health Systems,” and
? “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World”
Cato Policy Analysis no. 613. In Austria, about a third of the population has a supplemental private
insurance plan that covers additional charges not covered under the basic benefits, and about 30
percent of Belgians carry private supplemental policies. Approximately 30 percent of population
in Denmark purchases Voluntary Health Insurance (VHI) in order to cover the costs of statutory
copayments of the universal coverage package.
3 Exceptions include ?, ?, and ? on supplemental insurance.
4 The authors argue that drug coverage is probably the single most important channel through
with the offset operates for the chronically ill. Even though the time period we look at is before
Medicare Part D drug coverage was added, Medigap options that had drug coverage were very
unpopular as their premiums were very high. Thus, we may expect the even among the chronically
ill, Medigap private supplemental insurance may not have the offset effect the authors observe in
the CALPERs population.