In 2004, 29% of Medicare enrollees had Medigap coverage. Are these policies priced efficiently?
An NBER paper by Maestas, Schroeder and Goldman (2009) argues that the answer is no.
Prior to July 1992, Medigap was minimally regulated. With the passage of the Omnibus Budget Reconciliation Act of 1990 (implemented in July 1992), Medigap plans were standardized. Each plan fell into one of ten types–labelled plans A though J. Medigap plans are basically identical within each type. Further, since Medicap is a reinsurer–Medicare provides primary coverage–medical care quality is identical across plans.
Because of this homogeneity, one would expect to see small variations in Medigap plan prices. Maestas, Schroeder and Goldman, however, find significant price variation persists. One reason for this price variation is high search costs. Average search costs in the Medigap market are $72. Further, the authors conclude that:
“…the extensive (and perhaps overwhelming) array of unique options available, the elevated incidence of cognitive limitations among older individuals, and the high costs associated with fixing ‘wrong’ choices, all lead to a setting in which ‘choice overload’ is likely to prevail. To compensate, individuals turn to others whom they perceive to be experts: insurance agents. As we show, agents sell the vast majority of policies in the market but do not necessarily steer buyers to the best policies.”
- Maestas, Schroeder and Goldman (2009) “Price Variation in Markets with Homogenous Goods: The Case of Medigap,” NBER WP #14679.