David R. Henderson  

Medicare: Almost Everybody Loses

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The New Commanding Heights... Me and the Return to Education...

John Goodman's health policy blog this morning summarizes the results of a study done for the National Center for Policy Analysis by economists Courtney Collins and Andrew J. Rettenmaier. Goodman's table summarizes the most important points in the longer Collins/Rettenmaier study.

The gist of their study, which will surprise no one who thinks about it, is that the Medicare system gives a much better deal to people the older they are. Medicare, in short, is a Ponzi scheme.

But there's a big problem with their study. Correcting this problem makes the results even worse than Collins and Rettenmaier state. Throughout their study, the authors treat a dollar of Medicare spending on someone as if it's worth a dollar. But a dollar of Medicare spending will typically be worth less than one dollar.

To see why, ask yourself this: If the government were to offer to give you $100,000 in cash or to spend $100,000 on your medical care, which would you take? Most of us would take the former because we can always spend the $100K on medical care but we also have the option of spending it on other things. With the latter choice, we don't.

Yet the authors write like non-economists when they refer to, for example, "a dollar's worth of future spending." A dollar of spending is not typically worth a dollar unless you get to choose whether to spend it on health care or on other things.

Correcting their error--scaling down the spending by, say, 30% (I think the scaling down discount is even higher)--to reflect the value of the expenditure for each age cohort would then change the break-even age. Even people who are currently 65 would likely be net losers from Medicare. And maybe even people who are 75.

One final criticism: language matters. We should not adopt the government's euphemism for Medicare payroll taxes. The authors correctly call them taxes. John Goodman, in his post, calls them "contributions."


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COMMENTS (9 to date)
Devon Herrick, NCPA writes:

I think the same argument could be made about employer-sponsored private health insurance. Most employees do not know how much is being spent on their behalf and do not understand they are indirectly paying the cost through lower take-home pay.

I do not believe the average working family places, say, $12,000 in value on their health benefits. If they understood the trade-off they are making, most would demand a different arrangement, probably an HSA.

John Goodman writes:

David, I agree with both your comments.

There, that was easy.

John Goodman writes:

One more supporting comment: Most Medicare enrollees face no out-of-pocket costs when they consume care. Medigap insurance pays their copayment. So their incentive is to consume health care until its value, at the margin, is zero.

Not only is the last dollar spent not worth a dollar. It is worth almost nothing.

David R. Henderson writes:

@John Goodman,
That was easy. Thanks, John. :-)

AMW writes:

David says,

Throughout their study, the authors treat a dollar of Medicare spending on someone as if it's worth a dollar. But a dollar of Medicare spending will typically be worth less than one dollar.

To see why, ask yourself this: If the government were to offer to give you $100,000 in cash or to spend $100,000 on your medical care, which would you take? Most of us would take the former because we can always spend the $100K on medical care but we also have the option of spending it on other things.


Isn't that only true if one expects to spend less than $100,000 on health care? If one expects to spend $100,000 or more then every dollar of the benefit frees up one dollar for consumption of another good.
Tracy W writes:

But a dollar of Medicare spending will typically be worth less than one dollar.

To see why, ask yourself this: If the government were to offer to give you $100,000 in cash or to spend $100,000 on your medical care, which would you take?

I don't think this quite holds. After all, Medicare only kicks in if you want some medical care.

Compare with say, buying travel insurance. I pay $80 a year, and if I get sick or in an accident while overseas then my travel insurance company might pay $1 million out on my healthcare. I take this deal willingly. Although it would be even better from my point of view for the travel insurance company to just give me $1 million flat-out, that doesn't mean that if I need the medical care, that I'm not getting value from the spending.

David R. Henderson writes:

@Tracy W,
Reread your last sentence. You're saying what I'm saying.

Tracy W writes:

If so, then I have badly misread what you are saying, and I can't figure out where I am misreading you.

David R. Henderson writes:

@Tracy W,
OK. You took an example where you would value getting $1 million in cash more than getting $1 million in expenditure on medical care. I took an example where I value getting $100k in cash more than getting $100k in expenditure on medical care. Other than the size of the numbers, the point each of us is making is the same.

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