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Sources of Advantageous Selection: Evidence from the Medigap Insurance Market

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Author Info
Hanming Fang
Michael P. Keane
Dan Silverman

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Abstract

We provide strong evidence of advantageous selection in the Medigap insurance market, and analyze its sources. Using Medicare Current Beneficiary Survey (MCBS) data, we find that, conditional on controls for the price of Medigap, medical expenditures for senior citizens with Medigap coverage are, on average, about $4,000 less than for those without. But, if we condition on health, expenditures for seniors on Medigap are about $2,000 more. These two findings can only be reconciled if those with less health expenditure risk are more likely to purchase Medigap, implying advantageous selection. By combining the MCBS and the Health and Retirement Study (HRS), we investigate the sources of this advantageous selection. These include income, education, longevity expectations and financial planing horizons, as well as cognitive ability. Once we condition on all these factors, seniors with higher expected medical expenditure are indeed more likely to purchase Medigap. Surprisingly, risk preferences do not appear to be a source of advantageous selection. But cognitive ability emerges as a particularly important factor, consistent with a view that many senior citizens have difficulty understanding Medicare and Medigap rules.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12289.

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Date of creation: Jun 2006
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Handle: RePEc:nbr:nberwo:12289

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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Cited by:
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  1. Tsvetanka Karagoyozova & Peter Siegelman, 2006. "Is There Propitious Selection in Insurance Markets?," Working papers 2006-20, University of Connecticut, Department of Economics. [Downloadable!]
  2. Amy Finkelstein & James Poterba, 2006. "Testing for Adverse Selection with "Unused Observables"," NBER Working Papers 12112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Denise Doiron & Glenn Jones & Elizabeth Savage, 2008. "Healthy, wealthy and insured? The role of self-assessed health in the demand for private health insurance," Health Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 317-334. [Downloadable!]
  4. Florian Heiss & Daniel McFadden & Joachim Winter, 2007. "Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans," NBER Working Papers 13627, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Florian Heiss & Daniel McFadden & Joachim Winter, 2008. "Mind the Gap! Consumer Perceptions and Choices," MEA discussion paper series 08156, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  6. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2007. "The Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market," NBER Working Papers 13228, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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