Does greater Medicare HMO enrollment cause adverse selection into Medigap?

Area of Science:

• Health Economics
• Public Policy
• Insurance Markets

Background:

• The US Medicare program provides health insurance for individuals aged 65 and older and eligible disabled persons.
• Medicare managed care plans offer more comprehensive coverage than traditional Medicare.
• The Medigap market consists of privately purchased supplemental insurance policies.

Purpose of the Study:

• To examine the interaction between public (Medicare) and private (Medigap) insurance markets.
• To determine how Medicare managed care enrollment affects Medigap premiums.
• To investigate the phenomenon of adverse selection in the Medigap market.

Main Methods:

• Analysis of Medigap premiums from two large insurers.
• Utilized a fixed effects instrumental variables approach.
• Examined data from over 60 geographic areas between 1994 and 2000.

Main Results:

• A moderate upward effect of Medicare HMO penetration on Medigap premiums was found.
• Elasticities for this effect ranged from 0.09 to 0.25.
• A rise in Medicare HMO penetration from 12% to 22% could increase average Medigap premiums from $1,314 to $1,615.

Conclusions:

• Greater Medicare HMO penetration is linked to adverse selection in the Medigap market, leading to increased premiums.
• Findings have implications for designing national healthcare systems with integrated public and private insurance.
• The study highlights the interconnectedness of public health insurance enrollment and private supplemental insurance costs.