Medicare and Health Costs
By Arnold Kling
MIT’s Amy Finkelstein argues that (a) much of the increased use of technology in American medicine (what I term “premium medicine” in Crisis of Abundance) has been induced by Medicare, which reduced out-of-pocket costs and thereby increased the demand for care.
Finkelstein compares the change in insurance coverage induced by Medicare across different states–in some states the elderly were relatively well insured prior to Medicare, and in other states they were not. Using this “natural experiment” methodology, she finds that Medicare accounts for a large share of the increased spending on health care since 1965. However, she does not find any corresponding increase in health. She does, however, argue that Medicare had a very large risk-reduction benefit, by saving the very sick from having to suffer huge financial costs.
To me, this suggests trying to maximize the insurance benefits of health insurance (reducing financial risk) while minimizing its distortionary effects. The proposals in my book would head in that direction.