Bridging towards Medicare: Evidence from Massachusetts

Tuesday, June 14, 2016
Lobby (Annenberg Center)

Author(s): Hongming Wang


There is extensive evidence in the health and labor literature that workers in their early 60s have incentive to stay employed so that they retain affordable coverage from employers until eligible for Medicare at age 65. The 2006 reform in Massachusetts, widely regarded as the precursor of the subsequent national reform of ACA, unties insurance affordability from employment, and partly offsets the incentive to "bridge towards Medicare". Basing identi cation on the insurance discontinuity at age 65, I document large pull-back from labor force among subsidy eligible workers in age 60-64, for whom retirement propensity is higher the closer to Medicare, and social security onset is more likely at age 62. I argue in a social insurance model that welfare gain of premium subsidy is limited by the degree of moral hazard distortion, which in turn is exacerbated by public program crowding out private insurance. Both effects I estimate using simulated subsidy rate as instrument. I fi nd subsidy induces larger reduction in participation among near-retirement workers and longer unemployment duration among entering workers, whereas crowd-out is mostly concentrated at younger ages. Welfare calculation suggests current subsidy rate is higher than the optimal, especially for older workers.