I am grateful to numerous seminar participants at Harvard, Wharton, University of California-San Diego, University of Chicago-Booth, Duke, Northwestern-Kellogg, Princeton, and Stanford, Susan Athey, Michael Dickstein, Jon Kolstad, Greg Lewis, Julie Mortimer, Chris Nosko, Mark Pauly, Ashley Swanson, Bob Town, Dennis Yao, and especially David Cutler and Ariel Pakes for helpful comments. All errors are my own.
Insurer pricing and consumer welfare: evidence from Medigap
Article first published online: 25 MAR 2014
© 2014, RAND.
The RAND Journal of Economics
Volume 45, Issue 1, pages 198–220, Spring 2014
How to Cite
Starc, A. (2014), Insurer pricing and consumer welfare: evidence from Medigap. The RAND Journal of Economics, 45: 198–220. doi: 10.1111/1756-2171.12048
- Issue published online: 25 MAR 2014
- Article first published online: 25 MAR 2014
This article examines the welfare impact of imperfect competition in the Medicare supplement insurance (Medigap) market. Two firms control nearly three fourths of the Medigap market, and premiums exceed claims by over 25%. I find that a low price elasticity and consumers' brand preferences lead firms to engage in substantial marketing and price above cost. Therefore, the strategic behavior of insurers facing relatively inelastic demand is critical in explaining poor market performance. I also find that insurers do not capture all of the rents in this market; rents also accrue to actors who perform marketing functions, including agents and brokers.