Although most elderly are covered by Medicare, elderly patients face significant cost sharing. For instance, skilled nursing facilities stays are free for the first 20 days, cost $137.50 per day for days 21-100, and patients must pay out of pocket after 100 days. For Part B cost, patients must pay 20% of all costs. Further, Medicare patients also have significant cost sharing for inpatient stays.
However, many patients purchase Medigap gap to cover Medicare cost sharing. Early literature suggests that Medigap increases spending 15-25%. A presentation by Kate Bundorf at the 2016 ASSA meetings titled “The Effects of Medigap Supplemental Insurance on Health Care Spending Among Disabled Medicare Beneficiaries” aims to update this 2001 study using a regression discontinuity design looking at Medicare beneficiaries who qualify for coverage based on a disability. The discontinuity occurs because disabled beneficiaries do not receive guaranteed issue insurance, but once patients “age into” Medicare at age 65, they can receive guaranteed issue and open enrollment. Some states, however, mandate guaranteed issue for Medigap programs and the data do not show an increase in Medigap update after age 65 hinting that increased Medigap enrollment is due to easier underwriting at age 65.
Using this approach, the authors find that Part B spending increases due to Medigap but Part A declines. Looking a bit deeper, the healthier 3 quartiles actually increase spending for both Part A and B. For the highest-risk disabled beneficiaries, however, there are large decreases in Part A (i.e., hospital) cost. Thus, for most people, the moral hazard effect will increase cost, but for the sickest patients, there are large offsets in terms of lower Part A costs.