One feature of Medicare coverage is that individuals are responsible for 20% of their Part B (primary physician) costs, without limit. Individuals have traditionally purchased Medi-gap policies that cover this gap by paying for the out-of-pocket costs not covered by Medicare. But some Medi-gap policies did not cover this 20% copayment. Finkelstein (2002) studied the effects of a federal mandate that Medi-gap plans cover this 20% copayment. She found that this mandate would lead fewer individuals to buy Medi-gap coverage.
a. Why would the mandate lower the demand for Medi-gap coverage?
b. What do you think would be the net effect of this policy on the costs of the
Medicare program itself?