Macroeconomic Effects of Medicare

Conesa, Juan Carlos; Costa, Daniela; Kamali, Parisa; Kehoe, Timothy J.; Nygaard, Vegard; Raveendranathan, Gajen; Saxena, Akshar

doi:10.21034/sr.548

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Macroeconomic Effects of Medicare

Abstract: This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We ?nd 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 ?nd lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we ?nd 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.

Keywords: Transition path; Steady state; Medicaid; Overlapping generations; Medicare;

JEL Classification: E21; E62; H51; I13;

https://doi.org/10.21034/sr.548