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Macroeconomic Effects of Medicare

Staff Report 548 | Published April 26, 2017

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Juan Carlos Conesa Stony Brook University
Daniela Costa Penn Wharton Budget Model
Timothy J. Kehoe Consultant, University of Minnesota, and National Bureau of Economic Research
Vegard M. Nygaard University of Houston
Gajendran Raveendranathan McMaster University
Macroeconomic Effects of Medicare


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.

Published in: _Journal of the Economics of Ageing_ (Vol. 11, May 2018, pp. 27-40)