Working Paper: NBER ID: w26472
Authors: Mark Shepard; Katherine Baicker; Jonathan S. Skinner
Abstract: There is increasing interest in expanding Medicare health insurance coverage in the U.S., but it is not clear whether the current program is the right foundation on which to build. Traditional Medicare covers a uniformset of benefits for all income groups and provides more generous access to providers and new treatments than public programs in other developed countries. We develop an economic framework to assess the efficiency and equity tradeoffs involved with reforming this generous, uniform structure. We argue that three major shifts make a uniform design less efficient today than when Medicare began in 1965. First, rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people. Second, the dramatic expansion of expensive medical technology means that a generous program increasingly crowds out other public programs valued by the poor and middle class. Finally, as medical spending rises, the tax-financing of the system creates mounting economic costs and increasingly untenable policy constraints. These forces motivate reforms that shift towards a more basic public benefit that individuals can “top-up” with private spending. If combined with an increase in other progressive transfers, such a reform could improve efficiency and reduce public spending while benefiting low income populations.
Keywords: Medicare; Health Insurance; Uniform Benefits; Income Inequality; Medical Technology
JEL Codes: H4; H51; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rising income inequality (D31) | Mismatch between public benefit provided by Medicare and private optimal generosity desired by households (H49) |
| Mismatch between public benefit provided by Medicare and private optimal generosity desired by households (H49) | Inefficiencies (D61) |
| Expansion of expensive medical technology (O39) | Crowding out of other public programs valued by lower-income individuals (H53) |
| Crowding out of other public programs valued by lower-income individuals (H53) | Exacerbation of inefficiencies of the uniform Medicare structure (H51) |
| Rising medical spending and tax financing (H51) | Mounting economic costs (E64) |
| Current uniform Medicare program (I18) | Unsustainable structure (L16) |
| Shift towards a more basic public benefit that allows for private top-ups (H55) | Improved efficiency and reduced public spending while benefiting low-income populations (H53) |