The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare

Abstract

This paper investigates the effects of market-wide changes in health insurance by examining the single largest change in health insurance coverage in American history: the introduction of Medicare in 1965. I estimate that the impact of Medicare on hospital spending is substantially larger than what the existing evidence from individual-level changes in health insurance would have predicted. Consistent with a disproportionately larger impact of aggregate changes in health insurance, the evidence suggests that the introduction of Medicare altered the practice of medicine. For example, I find that the introduction of Medicare is associated with an increase in the rate of adoption of then-new medical technologies. A back of the envelope calculation based on the estimated impact of Medicare suggests that the overall spread of health insurance between 1950 and 1990 may be able to explain at least forty percent of the increase in real per capita health spending over this time period.