The Effects of Medicare on Medical Expenditure Risk and Financial Strain

Using data from the Medical Expenditure Panel Survey (MEPS) and the Health Tracking Household Survey (HTHS), we exploit the current discontinuity in Medicare coverage at age 65 to estimate the impact of Medicare on medical expenditure risk and health care related financial strain, heretofore underexplored issues. Based on data from 2007 to 2010, we find that at age 65 out-of-pocket expenditures drop by about 33% at the mean ($326) and 53% ($1730) among the top 5% of spenders. We also find large reductions in several measures of financial strain: problems paying medical bills, related collections agency contact, the amount owed in medical bills and borrowing or using savings to pay these bills all drop by about 30 to 35% at age 65. We find little evidence that these results are biased by the deferability of health care utilization. Our results suggest that Medicare offers the elderly significant protection against medical expenditure risk and financial strain. Based on a stylized expected utility framework we find that the gain from reducing out-of-pocket expenditures alone accounts for at least 12% of the social costs of financing the program. This calculation ignores both the stress-lowering benefits from reduced financial strain as well as any health improvements from access to Medicare. Using standard value of life estimates, for example, an extension of life by just one extra week would mean that the welfare gains from access to Medicare at age 65 fully balance the social costs.