Insurance Purchases of Older Americans

Authors

• Karolos Arapakis
• Eric French
• John Bailey Jones
• Jeremy McCauley

Abstract

Using data from the Health and Retirement Study (HRS) matched to administrative Medicare and Medicaid records, and the Medical Expenditure Panel Survey (MEPS), we estimate the determinants of Medigap insurance purchases of older Americans. Our data and framework allow us to consider multiple reasons individuals do not purchase Medigap insurance: (i) adverse selection caused by those in poorer health purchasing Medigap; (ii) crowd out due to Medicaid insurance coverage or the option to default on future medical debt; (iii) behavioral factors such as risk tolerance and cognition. We find that those who purchase Medigap spend approximately $2,300 more than those who do not. However, we find no evidence that this higher spending is caused by adverse selection in this market and only modest evidence that crowd out and behavioral factors are important for understanding Medigap purchases. Our results are consistent with the view that this higher spending is caused by moral hazard driven by the lower out-of-pocket prices for additional care faced by those with Medigap.

Key Findings

• Those with Medigap insurance consume $2,300 more health care per year than those without Medigap.
• We find no evidence that adverse selection drives higher consumption. In fact, we find that those who purchase Medigap are in better health, consistent with the hypothesis of “advantageous selection” in this market (i.e., healthier individuals purchase Medigap).
• We find only modest evidence that Medicaid and the option to default on future medical debt crowd out Medigap purchases.
• Behavioral factors such as risk tolerance and cognition are important for understanding Medigap purchases. However, we show these factors do not explain the higher medical spending of those purchasing Medigap.

Citation

Arapakis, Karolos, Eric French, John Bailey Jones, and Jeremy McCauley. 2023. “Insurance Purchases of Older Americans.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2023-463. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp463.pdf

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Project

• UM21-09: The Impact of Medical Spending Shocks on the Wealth and Insurance Purchases of Older Americans

Paper ID

WP 2023-463

Publication Type

Working Paper

Publication Year

2023