NCPA - National Center for Policy Analysis


February 28, 2007

Several states have recently mandated universal coverage for their residents.  Such reforms are likely to affect health-care spending, which has been growing faster than the overall economy for decades, says Amy Finkelstein, assistant professor of economics at MIT and a faculty research fellow at the National Bureau of Economic Research.

For evidence of how such programs can lead to increased spending, just look at the effects of the introduction of Medicare in 1966:

  • By 1970, the program caused a 37 percent increase in hospital spending, an enormous number.
  • Extrapolated out, between 1950 and 1990, Medicare is responsible for about half of the six-fold growth in real per capita health-care spending during this period.

Why does increased health insurance lead to increased health spending?  There are several reasons, says Finkelstein:

  • When individuals have insurance, they tend to consume more health care -- if you only have to pay some fraction of the cost, you are more likely to opt for more care.
  • Hospitals and doctors respond to the increased demand for health care by changing some of the ways in which they practice medicine.

In addition to its costs, Medicare did not have any effect at reducing elderly mortality in its first 10 years of existence, says Finkelstein. What this means is that the elderly were not foregoing life-saving treatments prior to Medicare. Overall, Medicare did not so much save lives as it did provide financial security.

Source: Amy Finkelstein, "The Cost of Coverage," Wall Street Journal, February 28, 2007.

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