Staff Report 548

Macroeconomic Effects of Medicare

Juan Carlos Conesa
Daniela Costa
Parisa Kamali
Timothy J. Kehoe | Consultant
Vegard Nygard | Research Analyst
Gajendran Raveendranathan
Akshar Saxena

Published April 26, 2017

Abstract
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.

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


Download Paper (pdf)