Insurer Pricing and Consumer Welfare: Evidence from Medigap∗

While adverse selection is often blamed for ineffi ciently high insurance premiums, imperfect competition is also a pervasive feature of many health insurance markets. In Medicare Supplement insurance (Medigap), two firms control nearly three-fourths of the market and premiums exceed claims by thirty percent. I find that while adverse selection can restrain markups, a low price elasticity and consumers’ brand preferences incentivize firms to engage in substantial marketing and price above cost. I conclude that the strategic behavior of insurers facing relatively inelastic demand is far more important than adverse selection in explaining poor market performance and loss of consumer