Financing Medicare: A general equilibrium analysis (original) (raw)
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Macroeconomic Effects of Medicare
2017
This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We find that a large share of the elderly respond by substituting Medicaid for Medicare. Consequently, the government saves only 46 cents for every dollar cut in Medicare spending. We argue that a comparison of steady states is insufficient to evaluate the welfare effects of the reform. In particular, we find lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we find that a majority of the current population benefits from the reform but that aggregate welfare, measured as the dollar value of the sum of wealth equivalent variations, is higher with Medicare.
Aging and Health Financing in the U.S. - A General Equilibrium Analysis
SSRN Electronic Journal, 2006
We quantify the effects of population aging on the US healthcare system. Our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre-2010 U.S. data. We find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of public vs. private insurance. Without the Affordable Care Act (ACA), aging itself leads to a 36.6 percent increase in health expenditures by 2060 and a 5 percent increase in GDP which is driven by the expansion of the healthcare sector. The group-based health insurance (GHI) market shrinks, while the individual-based health insurance (IHI) market and Medicaid expand significantly. Additional funds equivalent to roughly 4 percent of GDP are required to finance Medicare in 2060 as the elderly dependency ratio increases. The introduction of the ACA increases the fraction of insured workers to 99 percent by 2060, compared to 81 percent without the ACA. This additional increase is mainly driven by the further expansion of Medicaid and the IHI market and the stabilization of the GHI market. Interestingly, the ACA reduces aggregate health care spending by enrolling uninsured workers into Medicaid which pays lower prices for medical services. Overall, the ACA adds to the fiscal cost of population aging mainly via the Medicare and Medicaid expansion.
The Implications of Paying for Current Medicare
SSRN Electronic Journal, 2000
Medicare is America's second largest entitlement program and this year will account for 14 percent of the Federal budget, 3.2 percent of the nation's Gross Domestic Product (GDP) and is growing rapidly so that by the end of the Medicare Trustees 75-year projection period, 2080, the Medicare alone will account for 11.0 percent of GDP and all health care will consume 42 percent of GDP. This paper estimates the effect of covering the projected Medicare deficits with either additional taxes on the working generation or additional Medicare premiums imposed on the elderly. The additional taxation would require an increase in the current 2.9 percent payroll tax to almost 20 percent by the close of the Trustees 75-year projection period. If premiums are used to cover the deficits, by the close of the Trustees 75-year projection period the elderly would be faced with Medicare premiums that would more than exhaust the total projected Social Security check for a medium earner and use up more than three-fourths of a high earner's Social Security check.
The Economics of Medicare Reform
2000
Around the globe, entitlement programs for the elderly are at a crossroads. Without fundamental reform, the rapidly approaching retirement of the post war baby-boom generation will cause another boom in the form of higher tax rates on workers or a bust in the form of reduced benefits to retirees. As in many other developed countries, the United States' elderly entitlements-Medicare and Social Security-are supported by transfers from the young to the old. The question is, how will the United States and other countries prepare for the retirement of the baby boom? Because the programs are financed by taxes, the question is one of crucial importance in terms of public policy.
Social security and Medicare policy from the perspective of generational accounting
1992
introduced the concept of generational accounting, a method of determining how the burden of fiscal policy falls on different generations. it found that fiscal policy in the U.S. is out of balance, in terms of projected generational burdens. This means that either current generations will bear a larger share (than we project under current law) of the burden of the government's spending or that future generations will have to pay, on average, at leaat 21 percent more, on a growth-adjusted basis, than will those generations who have juat been born.
The Impact of Income-Related Medicare Part B Premiums on Labor Supply
ILR Review, 2019
The 2003 Medicare Modernization Act introduced income-related premiums on Medicare coverage for professional services (Part B) for the first time. Beginning in 2007, higher-income households were required to pay higher premiums for Part B coverage, which raises the price of Medicare relative to employer-sponsored health insurance for these households. The authors exploit this exogenous change in Medicare policy to examine the impact of Part B premiums on the labor supply decisions of older adults. They find that higher Medicare premiums delay retirement. Findings have important implications for Medicare policy and labor markets.
2011
In this paper we develop a stochastic dynamic general equilibrium overlapping generations (OLG) model with endogenous health capital to study the macroeconomic effects of the Affordable Care Act of March 2010 also known as the Obama health care reform. We find that the insurance mandate enforced with fines and premium subsidies successfully reduces adverse selection in private health insurance markets and subsequently leads to almost universal coverage of the working age population. On other hand, spending on health care services increases by almost 6 percent due to moral hazard of the newly insured. Notably, this increase in health spending is partly financed by the larger pool of insured individuals and by government spending. In order to finance the subsidies the government needs to either introduce a 2.7 percent payroll tax on individuals with incomes over $200, 000, increase the consumption tax rate by about 1.1 percent, or cut government spending about 1 percent of GDP. A stable outcome across all simulated policies is that the reform triggers increases in health capital, decreases in labor supply, and decreases in the capital stock due to crowding out effects and tax distortions. As a consequence steady state output decreases by up to 2 percent. Overall, we find that the reform is socially beneficial as welfare gains are observed for most generations along the transition path to the new long run equilibrium.
Health Care Financing over the Life Cycle, Universal Medical Vouchers and Welfare
Towson University, Department of Economics, …, 2009
In this paper we develop a stochastic dynamic general equilibrium overlapping generations (OLG) model with health as a durable good to study the life-cycle behaviors of health care spending and financing. We show that a calibrated version of our generalized Grossman model is able to match the life-cycle trend of insurance take up ratios and average medical expenditure from the Medical Expenditure Panel Survey (MEPS) data in 2004/05. We then apply our model to analyze the macroeconomic implications of a counter factual health care reform in the U.S., using a system of universal health insurance vouchers. Our results suggest that health insurance vouchers are able to extend insurance coverage to the entire population but they also increase aggregate spending on health. More importantly, we find that the positive insurance effect (efficient risk pooling) dominates the negative incentive effect (tax distortions and moral hazard) which results in significant welfare gains for all generations when a payroll tax is used to finance the voucher program. In addition, our results suggest that the choice of tax financing instrument and accounting for general equilibrium adjustments are critical in determining the performance of the voucher program.