FindingDec 10, 2019

Does One Medicare Fit All? The Economics of Uniform Health Insurance Benefits

Katherine Baicker, Mark Shepard, Jonathan S. Skinner
An alternative to a single, generous public benefit would be a more basic universal benefit—one with good financial protection and coverage for services with substantial health benefits, but with limited or no coverage for expensive, lower-value services.
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The US looks very different now from 1965, in ways that make having a single Medicare program for everyone less efficient and less financially sustainable.

  • First, medical technology has advanced by leaps, improving health and extending lives, but at mounting cost. For example, a heart attack that would have killed a patient in 1965 can now be successfully treated, but with an average hospital stay costing $20,000. While rich and poor could thus afford similar health care in 1965 because treatment was simpler and less expensive, the cost of providing everyone with all available treatment has skyrocketed as medical technology has evolved.
  • Second, while top tax rates have fallen since the 1960s, average overall marginal tax rates have increased. These higher marginal tax rates come at a cost that goes beyond the actual revenues raised: they change the decisions and investments made throughout the economy, exerting a drag on economic activity (dubbed “deadweight loss”). This means the economic toll of financing new health benefits has become much larger.
  • Finally, income inequality has risen substantially, and people with different incomes may want to devote a different share of resources to health care. Higher income households might opt for a generous, comprehensive benefit—but that would eat up an enormous share of overall resources available to lower income households. This raises the social cost of having a single, uniform plan. Forcing a generous plan on low-income households would make them worse off than a combination of a less generous plan with more generous other social insurance programs, while forcing a more basic plan on high-income households would prevent them from spending resources on health care that they value, and might in fact slow the development of new, life-saving medical technologies.

With these trends likely to continue, covering everyone with a uniform generous insurance plan will be increasingly challenging. An alternative would be to provide a more basic benefit to everyone—one with good financial protection and coverage for services with substantial health benefits, but with limited or no coverage for expensive, lower-value services. Higher income people could pay to add on coverage of those lower-value services.