Question

Health Economics and Policy Ch. 12 Question 5

What is Medigap insurance? How does the existence of Medigap policies affect the cost of providing medical services to the elderly? Was Mark Pauly correct when he observed that the provision of some insurance might be suboptimal? ( see "The Economics of Moral Hazard: Comment" American Economic Review 58(2), June 1968, 531-538)

Answer 1

Medigap is an extra or supplementary health insurance which can be purchased from a private company to pay for health care costs which are not covered by original Medicare such as co-payments, deductibles, and health care if you travel outside the U.S. In a Medigap plan, you pay a monthly premium to the insurance company in addition to your Medicare. Medigap policies generally don't cover long-term care, vision or dental care, hearing aids, eyeglasses, or private-duty nursing.

Medigap is intended to protect against relatively small but potentially devastating risk of high medical expenses not covered by Medicare. These policies are generally expensive because they are not subsidized by government. Though these policies are costly, they have exceptional benefits. As the seniors are supposed to be more risk averse, they are willing to a Medigap premium that’s much higher than the average cost of care.