Macroeconomic Effects of Medicare

32 Pages Posted: 8 May 2017

See all articles by Juan Conesa

Juan Conesa

State University of New York (SUNY), Stony Brook

Daniela Costa

University of Minnesota - Minneapolis

Parisa Kamali

University of Minnesota - Minneapolis

Timothy J. Kehoe

University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Vegard Nygard

University of Minnesota - Minneapolis

Gajendran Raveendranathan

McMaster University

Akshar Saxena

Harvard University - T.H. Chan School of Public Health

Date Written: May 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.

Suggested Citation

Conesa, Juan and Costa, Daniela and Kamali, Parisa and Kehoe, Timothy J. and Nygard, Vegard and Raveendranathan, Gajendran and Saxena, Akshar, Macroeconomic Effects of Medicare (May 2017). NBER Working Paper No. w23389. Available at SSRN: https://ssrn.com/abstract=2964685

Juan Conesa (Contact Author)

State University of New York (SUNY), Stony Brook ( email )

Daniela Costa

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Parisa Kamali

University of Minnesota - Minneapolis

Timothy J. Kehoe

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
1169 Management & Economics
Minneapolis, MN 55455
United States
612-625-1589 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vegard Nygard

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Gajendran Raveendranathan

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://https://sites.google.com/site/gajendranraveendranathan/home

Akshar Saxena

Harvard University - T.H. Chan School of Public Health ( email )

677 Huntington Avenue
Boston, MA MA 02115
United States

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