A Detailed Analysis Of The Premium Variation In The Market For Medicare Supplemental Insurance
Medicare guarantees health insurance coverage for any person 65 or older. However, Medicare coverage is not complete and the additional costs are substantial: for example, the hospital deductible for part A is $956 and the part B deductible amounts to $123 in 2006. The elderly can insure against these financial risks by obtaining supplemental insurance from different sources. A private market designed to cover the "gaps" in Medicare is known as the "Medigap" market. This market is regulated since 1992 by the Omnibus Budget Reconciliation Act of 1990. The law created markets with homogenous goods mainly by standardizing the policies that could be offered. Economic theory predicts that in a market for homogenous goods, there should be little or no price variation. However, premiums of Medigap policies continue to vary even within narrowly defined markets. This dissertation is concerned with finding economic explanations for this puzzle. Sources of premium variation in the Medigap market are empirically investigated as well as reasons for why premium variation is sustained. Chapter one provides a general overview of the Medigap market and points out specific peculiarities due to the Omnibus Budget Reconciliation Act of 1990. In the second chapter, which is joint work with Nicole Maestas and Dana Goldman, differences in the populations covered by insurance firms are investigated with respect to their impact on actuarially fair premiums. The third chapter focuses on how firms set prices for specific components of Medigap premiums and how these change over time. Also, the degree to which firm and state specific variables explain premium variation is investigated. The fourth chapter (joint with Nicole Maestas and Dana Goldman) targets the consumer side of the Medigap market by estimating a structural model that allows for sustained price variation due to consumer search costs. The findings in this dissertation suggest that premium variation is at least partially caused by firm specific differences The premium variation is sustained through consumer search costs and thus uninformed consumers. However, there are some indications that the market experienced an increase in competition that reduces premium variation.
Premium Variation; Homogenous Goods; Search Costs; Medigap