Medicare was designed with significant cost-sharing provisions, including a hospital inpatient deductible and outpatient service copays, in order to help deter inappropriate use. Many Medicare beneficiaries in the fee-for-service program, however, have purchased Medicare Supplement or MediGap insurance that covers those cost-sharing amounts, as well as services not covered at all by Medicare. Around 86% of the 50 million beneficiaries in 2012 purchased such insurance or receive some form of supplemental coverage, such as Medicaid. The paper focuses on the roughly 48% who buy private supplemental coverage. This has long been controversial, as the presence of such insurance appears to increase use of services and costs for the Medicare program. There have been Medicare Supplement reform proposals ranging from a complete banning of MediGap policies, to limiting how much of the Medicare cost-sharing amounts they cover to taxing such policies and thereby raising their costs. A new report published by the National Bureau of Economic Research confirms that MediGap insurance raises costs and examines what level of tax might be needed to help reduce those excess costs. (MediGap Report)
Using a quirk of Medicare Supplement insurance markets, which are regulated on a statewide basis, versus health care service markets, which can sometimes cross state borders, the researchers find that the purchase of Medigap is price-sensitive, with a demand elasticity of -1.5 to -1.8. They further find that Medigap increases Part B claims by almost 34% and hospital stays by 23.9%, with a total average per person effect of $1,396 or 22%. It should be noted that it is not clear that all the extra services are unnecessary or that a reduction in service receipt caused by cost-sharing would not lower health status, but on very gross measures, it does not appear that it would. A tax of 15% of premiums would reduce Medigap purchase by 13% and reduce government spending by 4.3% per beneficiary or $12.9 billion. A tax equivalent to the full amount of excess spending caused by Medicare Supplement would likely eliminate the market and result in over a 10% reduction in Medicare spending or an annual saving of $31.6 billion. The presence of Medicare Supplement insurance does appear to be a problem, but this paper also has potential weaknesses. It relied on survey data to identify those with Medigap and it ignores the large snowbird population in discussing costs. Determining what costs to attribute to what geographic region is tricky when people spend large parts of the year in different service markets. But it appears almost certain that Congress and CMS will in some way reform supplemental coverage.
The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry. Mr. Roche is available to assist health care companies through consulting arrangements through Roche Consulting, LLC and may be reached at 
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