Medicare Advantage Reigns. So Who Still Buys Medigap? – Center for Retirement Research

Low premiums, aggressive marketing and extras like dental care and prescription drugs have propelled Medicare Advantage plans to half of the retiree insurance market. Nevertheless, some people still prefer traditional Medicare combined with Medigap insurance.   

Medigap buyers on average use $12,200 in medical care annually –  $2,300 more than everyone else on Medicare – according to the first known study to capture all sources of spending over many years, including Medicare payments, the retirees’ out-of-pocket deductibles, copayments and coinsurance for tests and care, and payments by insurers and other public programs. (Premiums are excluded from the estimate.)

Since Medigap buyers spend more, a logical supposition is that they are less healthy. But the researchers found that they are actually healthier than other retirees. Their incidence of diabetes and of cardiovascular disease are lower. They even spend more on healthcare than comparable retirees with the same health profiles. 

Medigap is very different than the Advantage plans that dominate the market. Medigap is a separate insurance policy that supplements the federal government’s direct payments through Medicare Part A and Part B for hospital care and medical services. Under Advantage plans, the government pays insurers to provide all of the care under a private policy.

Medigap also allows retirees to choose their doctors. Advantage plans operate like HMOs, which control the cost of care by requiring policyholders to stay within an approved network of providers.

Since poor health doesn’t seem to be the reason Medigap buyers are using more medical services, the researchers considered another possibility: they have higher cognitive functioning and understand why receiving more care is important. Or perhaps low-income retirees often stay out of the Medigap market because they think they might qualify for Medicaid, with its large government subsidies, and don’t anticipate needing the protection that private Medigap provides. But neither of these explanations panned out in comparisons with other retirees.

So, the question remains: why do Medigap buyers spend $2,300 more on healthcare? The researchers argue that since the various characteristics of the retirees themselves cannot explain this additional spending, their findings are consistent with “moral hazard.” Moral hazard, which is difficult to quantify, is a situation in which individuals who have Medigap spend more simply because they face lower out-of-pocket costs under these policies.

The researchers conclude that moral hazard “may lead these individuals to demand more [care] than those without Medigap.”

In other words, Medigap buyers are essentially getting more but paying less out-of-pocket for doctor’s appointments, medical care, and tests.

To read this study by Karolos Arapakis, Erich French, John Bailey Jones and Jeremy McCauley, see “Insurance Purchases of Older Americans.”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

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