Working Paper: NBER ID: w14679
Authors: Nicole Maestas; Mathis Schroeder; Dana Goldman
Abstract: Nearly 30 percent of Americans age 65 and older supplement their Medicare health insurance through the Medigap private insurance market. We show that prices for Medigap policies vary widely, despite the fact that all plans are standardized, and even after controlling for firm heterogeneity. Economic theory suggests that heterogeneous consumer search costs can lead to a non-degenerate price distribution within a market for otherwise homogenous goods. Using a structural model of equilibrium search costs first posed by Carlson and McAfee (1983), we estimate average search costs to be $72. We argue that information problems arise from the complexity of the insurance product and lead individuals to rely on insurance agents who do not necessarily guide them to the lowest prices.
Keywords: Medigap; Price Variation; Consumer Search Costs
JEL Codes: I2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| standardization of Medigap plans (I18) | price variation (D46) |
| reliance on insurance agents (G52) | higher-priced policies (G52) |
| search cost distribution (D39) | complexity of insurance products (G52) |
| search costs (D23) | welfare losses (D69) |
| search costs (D23) | price variation (D46) |
| heterogeneous consumer search costs (D11) | non-degenerate price distribution (D39) |