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The Effects of Medicare on Medical Expenditure Risk and Financial Strain

Silvia Helena Barcellos and Mireille Jacobson

American Economic Journal: Economic Policy. Nov 2015, Vol. 7, No. 4: Pages 41-70

The Effects of Medicare on Medical Expenditure Risk and Financial Strain^†

Silvia Helena Barcellos¹ and Mireille Jacobson²

¹Center for Economic and Social Research (CESR), University of Southern California (USC), 635 Downey Way, Los Angeles, CA 90089 (e-mail: [email protected])

²The Paul Merage School of Business, University of California, Irvine, CA 92697-3125 and National Bureau of Economic Research (NBER) (e-mail: [email protected])

Abstract

Medicare offers substantial protection from medical expenditure risk, protection that has increased in recent years. At age 65, out-of-pocket expenditures drop by 33 percent at the mean and 53 percent at the ninety-fifth percentile. Medical-related financial strain, such as difficulty paying bills and collections agency contact, is dramatically reduced. Nonetheless, using a stylized expected utility framework, the gain from reducing out-of-pocket expenditures accounts for only 18 percent of the social costs of financing Medicare. This calculation ignores any direct health benefits from Medicare or any indirect health effects due to reductions in financial stress. (JEL D14, H51, I13, I18, J14)

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The Effects of Medicare on Medical Expenditure Risk and Financial Strain†

The Effects of Medicare on Medical Expenditure Risk and Financial Strain^†