Medicare Introduction in 1965
Introduction
Representing $260 billion in spending annually, the US Medicare program constitutes about 17% of all US health expenditures, one-eighth of the federal budget, and 2% of GDP. Medicare was enacted in July 1965 and implemented essentially nationwide in July 1966, providing virtually universal public health insurance to individuals aged 65 and older.
Finkelstein and McKnight (2008) study the introduction of Medicare in the late 1960s using variation in the pre-existing fraction of the population that was insured. They use this variation to estimate the causal effect of Medicare on healthcare utilization, health, and consumption smoothing. They find that Medicare reduces out of pocket spending by $117. It also reduces expenditure on private health insurance by $507; but results in an increase in public insurance spending by the government of $766, of which $142 is the result of increased healthcare utilization. Hendren and Sprung-Keyser (2020) translate these estimates into their implied MVPF.
MVPF = 1.6
Net Cost
Finkelstein and Mcknight (2008) estimate that the introduction of Medicare led to an increase in government spending on medical services of $766. This increase in spending is estimated directly in the data and includes both the cost increase due to the mechanical change in insurance eligibility and the behavioral response to the insurance eligibility.
Willingness to Pay
From a willingness to pay perspective, individuals should value insurance through the reduction in expenditure on private health insurance of $507 and the fact that they no longer have to pay the out of pocket spending of $117, for a total of $624. But, in addition to the transfer, Finkelstein and McKnight (2008) calibrate a model of utility to incorporate the value of insurance in reducing consumption dispersion from an ex-ante insurance perspective. Assuming a coefficient of relative risk aversion of 3, they find an additional willingness to pay for improved consumption smoothing of $585. Incorporating this consumption smoothing benefit suggests a WTP of $1,209. Finally, in addition to the consumption smoothing benefits, they also estimate a small and statistically insignificant effect on mortality. Using a VSLY of $100K per year, they find a WTP from improved health of $36. This implies a total WTP of 1245.
MVPF Summary
Combining the WTP of $1,245 and cost of $766 suggests an MVPF of 1.625. Hendren and Sprung-Keyser (2020) estimate a 95% confidence interval for this of [0.48, 3.55].
References
Finkelstein, Amy and Robin McKnight (2008). “What Did Medicare Do? The Initial Impact of Medicare on Mortality and Out of Pocket Medical Spending,” Journal of Public Economics, 92(7), 1644-1668. DOI: https://doi.org/10.1016/j.jpubeco.2007.10.005
Hendren, Nathaniel and Ben Sprung-Keyser (2020). “A Unified Welfare Analysis of Government Policies.” The Quarterly Journal of Economics, 135(3): 1209–1318. DOI: https://doi.org/10.1093/qje/qjaa006
Policy Features
- Category
- Social Insurance
- Sub-Category
- Health Adult
- Beneficiary Type(s)
- Adults, Seniors (65+)
- Average Age
- 77
- Average Income
- 394323
- Country of Implementation
- United States
- Year of Implementation
- 1965
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- Yes
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614