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CHAPTER 3. MEDIGAP 138
calculated using the estimated premium semi-elasticity of 0.475 (Table 3.6, specifi-
cation 3) and assuming the tax is completely passed through. 22 We estimate tax
revenue by applying the tax to the resulting share of Medigap enrollees. Cost savings
are calculated by reducing the medical costs of individuals who drop Medigap by 37.0
percent, the factor implied by the estimated parameter of 0.588 from specification 3
of Table 3.7 (i.e., 0.370 =1 - 1/(1+0.588)). Medicare cost savings are calculated as
80 percent of this number, consistent with Medicare paying 80 percent on the margin
for care. The total budgetary impact is simply the sum of the revenue and Medicare
cost effects.
Table 3.9 presents these revenue and cost savings estimates for the standard sample
of individuals with Medigap, Medicare Advantage, and no supplemental coverage.
In this sample, baseline Medigap enrollment is 35.8 percent, and Medical costs for
Medigap enrollees average $9,458 per annum. The results are presented in dollars per
beneficiary and as a percentage of Medicare costs of $5,528 on average for Medigap
enrollees. A 20 percent tax would reduce coverage by 9.5 percentage points, raising
1.3 percent of total costs in tax revenue and 4.8 percent of total costs in reduced
utilization for total budgetary savings of 6.2 percent. A 40 and 60 percent tax would
save 11.4 and 15.6 percent of costs respectively. And a 76 percent tax, which would
increase Medigap premiums by $1,076, or about 50.5 percent of the implied $2,802
(=0.37 x $9,458 x 0.80) externality, would reduce the Medigap market share to zero,
savings 18.1 percent of total costs entirely though decreased medical utilization.
Although it probably goes without saying, we remind the reader that the pa-
rameters are estimated using local variation in premiums and the projected effects of
larger taxes and subsidies should be viewed with appropriate caution. It is also worth
mentioning that under current law, a tax that reduces FFS Medicare costs would re-
duce minimum Medicare Advantage payments. This is not taken into account in our
simple tax simulations, and would likely magnify the cost savings we project.
Last but not least, we want to call attention to the fact that a uniform tax on
Medigap premiums is a blunt instrument for controlling Medicare costs. Chandra et
22 In the case of incomplete pass-though, one can think of the counterfactuals as simulating the
impact of tax that would give rise to the full pass-though increase in premiums.