NCPA - National Center for Policy Analysis

Medigap Standards Reduce Insurance Protection

October 24, 2002

Minimum government standards on private medical insurance for the elderly have led to lower coverage than would have been the case in the absence of such regulations, say researchers. Minimum standards imposed on "Medigap" insurance 25 years ago resulted in a decline in voluntary purchase of the regulated supplemental insurance policies.

This finding is of particular interest because minimum standards continue to be applied or proposed in many different health insurance markets, including state-imposed minimum standards on employer-provided health insurance and federal proposals for a "Patients' Bill of Rights" that would impose minimum standards on Health Maintenance Organizations (HMOs).

  • The introduction of the minimum standards was associated with a 15 percent decline in non-group coverage in the first two years, and a long-run decline of 25 percent.
  • There is no evidence that individuals switched to other forms of insurance that were less regulated.
  • Furthermore, although few non-group policies would have met the minimum standards prior to the implementation of the regulations, many of these policies had provided additional benefits -- such as prescription drug coverage or coverage for care in a skilled nursing facility -- not required by the minimum standards.
  • The evidence suggests that the minimum standards also were associated with a substantial reduction in coverage of these non-mandated benefits for those who retained non-group Medigap insurance.

These results highlight the fact that policy makers need to think carefully about the nature of the market failure that motivates the regulation, experts say, and ask whether government intervention might make the problem worse rather than better. In this instance, while the problem of adverse selection might suggest the need for government intervention, it also exacerbated the negative consequences of this intervention.

Source: Andrew Balls, "Mandatory Medigap Standards Reduce Insurance Protection," NBER Digest, October 2002; based on Amy Finkelstein, "Minimum Standards and Insurance Regulation: Evidence from the Medigap Market," NBER Working Paper No. 8917, May 2002, National Bureau of Economic Research.

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