Background Proposals to expand Medicare coverage tend to be expensive, but the value of services purchased is not known. This study evaluates the efficiency of the average private supplemental insurance plan for Medicare recipients. Methods Data from the National Health Interview Survey, the National Death Index, and the Medical Expenditure Panel Survey were analyzed to estimate the costs, changes in life expectancy, and health-related quality of life gains associated with providing private supplemental insurance coverage for Medicare beneficiaries. Model inputs included socio-demographic, health, and health behavior characteristics. Parameter estimates from regression models were used to predict quality-adjusted life years (QALYs) and costs associated with private supplemental insurance relative to Medicare only. Markov decision analysis modeling was then employed to calculate incremental cost-effectiveness ratios. Results Medicare supplemental insurance is associated with increased health care utilization, but the additional costs associated with this utilization are offset by gains in quality-adjusted life expectancy. The incremental cost-effectiveness of private supplemental insurance is approximately $24,000 per QALY gained relative to Medicare alone. Conclusion Supplemental insurance for Medicare beneficiaries is a good value, with an incremental cost-effectiveness ratio comparable to medical interventions commonly deemed worthwhile.