Insurance Purchases of Older Americans

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.