Taxation of Medigap Policies

Many health insurance policies include cost-sharing mechanisms, such as deductibles, coinsurance, and copayments. In many settings, individuals can purchase supplemental insurance which reduces their exposure to these forms of cost sharing. Most elderly Americans have health insurance through Medicare, which controls utilization with a deductible of approximately $1,000 for each hospital admission and coinsurance of 20% for physician office visits. Although most private insurance prohibits the purchase of supplemental insurance, Medicare allows its beneficiaries to purchase private supplemental insurance called Medigap that covers the costs associated with coinsurance.

Cabral and Mahoney (2019) study the impact of Medigap on healthcare utilization and Medicare costs. They exploit variation in Medigap prices across state boundaries. They find that lower prices for Medigap leads to greater Medigap take-up. This in turn increases healthcare utilization and the costs to Medicare, who covers 80% of the cost of this utilization. Hendren and Sprung-Keyser (2020) translate these analyses into their implied MVPF of a Medigap tax. Hendren and Sprung-Keyser (2020) consider the specification that analyzes the impact of going from a 5% to 0% tax on Medigap from Table 9 of Cabral and Mahoney (2019).