Impact of varying Medigap insurance coverage on the use of medical services of the elderly

A recursive model is estimated for the demand for Medigap insurance coverage and for expected total medical care expenditures. It is found that higher levels of coverage are associated with increased expenditures through higher probabilities of incurring a medical expense and increased levels of expenditures. Those with poor health had a smaller likelihood of having insurance than those with better health status, contrary to the notion of adverse selection. However, those in poor health status who obtained health insurance tended to purchase more insurance coverage than those with better health status, consistent with adverse selection. Non-whites were at a disadvantage in terms of the probability of having Medigap insurance and expected medical expenditures.