Creator: Conesa, Juan Carlos, Costa, Daniela, Kamali, Parisa , Kehoe, Timothy Jerome, 1953-, Nygaard, Vegard M., Raveendranathan, Gajendran, and Saxena, Akshar Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 548 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.
Keyword: Steady state, Medicare, Transition path, Medicaid, and Overlapping generations Subject (JEL): I13 - Health Insurance, Public and Private, E21 - Macroeconomics: Consumption; Saving; Wealth, E62 - Fiscal Policy, and H51 - National Government Expenditures and Health