In recent years, many elderly people have purchased Medigap insurance policies to cover a growing Medicare copayment. These policies cover some or all of the medical costs not covered by Medicare. Use economic theory to explain how the growth of these policies is likely to influence the demand for healthcare by elderly people.

An increase in medical copayments would make the medical expenses being expensive to elderly people, even thought elderly people are covered by Medicare. Because of that, the number of hospital visits of elderly people would be reduced. With that being said, the potential demand and actual demand for medical services would have a significant gap.

The appearance of Medigap insurance and other similar policies would erase gap in pricing, which makes medical services more affordable for elderly people. That would move the actual demand close to the potential demand for medication, assuming that supply and price of medical services stay unchanged.