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

CHAPTER 3. MEDIGAP 139
al. (2007) have shown that targeted subsidies that reduce cost-sharing for chronically
ill Medicare beneficiaries can generate cost savings or “offsets” by encouraging treat-
ment adherence and reducing unnecessary hospitalizations. A nuanced tax policy,
which takes such effects into account, might be able to generate both increased costs
savings and improved health.
3.8 Conclusion
In this paper, we have estimated the fiscal externality imposed by private Medigap
supplemental insurance on public Medicare costs. We find that the moral hazard
induced by Medigap is substantial, with marginal enrollees using 57 percent more
services due to Medigap coverage. Policy counterfactuals reveal that a uniform tax
that raises premiums 20 percent could generate combined revenue and savings of 6.2 of
baseline costs; a Pigovian tax that fully accounts for the fiscal externality could yield
savings of 18.1 percent. We are interested in the effects of more nuanced tax policies
that account for “offsets” from treatment adherence or other positive externalities. In
light of the findings of significant moral hazard from Medigap, we view the study of
supplemental insurance around the world as an important topic for future research.