Two economists say gap-filling products lead to so much extra Medicare spending that simply taxing the products could lead to big savings. 

Marika Cabral of the University of Texas and Neale Mahoney of the University of Chicago make that argument in a copyrighted working paper posted behind a paywall on the website of the National Bureau of Economic Research.

Cabral and Mahoney looked at the effects of Medicare supplement insurance, or “Medigap” policies, on spending at the traditional Medicare program.

The eonomists studied the market to analyze a real-world example of how supplemental insurance which reduces consumer out-of-pocket costs, or “skin in the game,” can affect claims at the main insurance plan.

The economists analyzed Medicare program spending data in hospital service areas that cross state borders and have different Medigap premiums on each side of the border.

The economists tried to adjust for many variables that could skew comparisons, such as the possibility that Medigap appeals to sicker consumers who would also spend heavily even if they only had traditional Medicare.

The economists concluded that Medigap plans increase an individual’s Medicare spending by an average of 22 percent, or about $1,400 per year, with the coverage increasing hospitalization spending 24 percent and physician services spending 34 percent.

A simple 15 percent tax on Medigap premiums could generate about $13 billion per year in spending cuts and tax revenue, and a “Pigouvian tax” — a premium tax that compensated Medicare for the full effects of Medigap on Medicare spending — could generate about $32 billion in annual savings, the economists estimate.

The researchers did not look in detail at the effects of the extra Medicare spending related to Medigap on the patients’ health or satisfaction with care, but they found that use or lack of use of Medigap had no noticeable effect on the likelihood that patients would get genuinely urgent procedures, such as aneurysm repair procedures.

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