Demand for Medigap insurance by the elderly: a micro-simulation analysis

In this paper, a micro-simulation model is developed to explain and estimate the optimum Medigap insurance coverage for elderly with different levels of insurance premium subsidy. The Medigap risk exposure is estimated from the 1977 National Medical Care Expenditure Utilization Survey, utilizing the gamma distribution. The theory of expected utility maximization is assumed and the model for health insurance demand is operationalized for hypothetical parameters for risk aversion, the price elasticity of demand, the loading fee and the subsidy. With the risk-aversion parameter at 0.0005, the price elasticity of medical-care demand at –0.5, loading costs at 9%, without any subsidy, the optimal Medigap coinsurance rate is 0.78; and with a premium subsidy of 60%, the co-insurance rate falls to 12%. The hypothetical price elasticity of demand for Medigap insurance is estimated to be between –0.44 and –1.02. More than half of the increase in medical expenditure resulting from an increase in premium subsidy from 0.35 to 0.60 is a welfare loss