NCPA - National Center for Policy Analysis

MEDICARE AND ITS IMPACT

May 24, 2006

The overall spread of health insurance between 1950 and 1990 may be able to explain at least 40 percent of that period's dramatic rise in real per capita health spending, says researcher Amy Finkelstein.

At an annual cost of $260 billion, Medicare is one of the largest health insurance programs in the world. Providing nearly universal health insurance to the elderly as well as many disabled, Medicare accounts for about 17 percent of U.S. health expenditures, one-eighth of the federal budget, and 2 percent of gross domestic production. Medicare's introduction in 1965 was, and remains to date, the single largest change in health insurance coverage in U.S. history.

  • Finkelstein estimates that the introduction of Medicare was associated with a 23 percent increase in total hospital expenditures (for all ages) between 1965 and 1970, with even larger effects if her analysis is extended through 1975.
  • Extrapolating from these estimates, Finkelstein speculates that the overall spread of health insurance between 1950 and 1990 may be able to explain at least 40 percent of that period's dramatic rise in real per capita health spending.

Furthermore, Finkelstein suggests that market-wide changes in health insurance -- such as the introduction of Medicare -- may alter the nature and practice of medical care in ways that experiments affecting the health insurance of isolated individuals will not. As a result, the impact on health spending of market-wide changes in health insurance may be disproportionately larger than what the estimates from individuals' changes in health insurance would suggest.

For example, market wide changes in health insurance may increase market demand for health care enough to make it worthwhile for hospitals to incur the fixed cost of adopting a new technology. Finkelstein presents suggestive evidence that the introduction of Medicare was associated with faster adoption of then-new cardiac technologies.

Source: Matt Nesvisky, "Medicare and Its Impact," NBER Digest, April 2006; based upon: Amy Finkelstein, "The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare," National Bureau of Economic Research, Working Paper No. 11619, September 2005.

For text:

http://papers.nber.com/digest/apr06/w11609.html

For Finkelstein text:

http://www.nber.org/papers/11619

 

Browse more articles on Health Issues