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The Aggregate Effects of Health Insurance: Evidence
from The Introduction of Medicare
Background
US share of health care: 5% (1960), 16% (2004)
US real medical spending : increase 6 times between 1950 and 1990.
Rand experiment findings Total Exp increases about 1.5 times when the
coinsurance rate drops from 95% to 0% The spreading of health insurance can only
explain about one eighth to one tenth of medical spending
Research Question
How important is the role of health insurance in explaining the growth of medical spending?
Explore the impact as a result of Medicare, established in 1965, the single and largest change in health insurance coverage in U. S.
Identification Strategy
Different regions of the country had different rate of private insurance coverage prior to Medicare
Use the regional variations to estimate the spending in the hospital sector
Data
American Hospital Association (AHA) data: 1948-1975
Six hospital outcomes: Total expenditure Payroll expenditure Employment Beds Admission Patient days
Econometric Model
1975
1948
log( ) *1( ) *1( )
( )*1( )
1( ) : county fixed effect
1( ) : year fixed effect
: other controls
( ) : The p
ijt j j t t
t
t z t st ijtt
j
t
st
t z
y county Year
Mcareimpact Year X
county
Year
X
Mcareimpact
ercentage of the elderly without
Blue Cross hospital insurance in 1963
Estimated Results
Estimated Results
Estimated Results
First two years
Since nationwide, Medicare increased the proportion of the elderly with insurance coverage by 75 percentage points.
Admissions: 46 percent (~ [exp(0.504 x 0.75)-1])
Total spending: 28 percent (~ [exp(0.332 x 0.75)-1]).
Robustness Checks
)()(5 1960196519651970
Why Larger Estimates than Rand Experiment?
Rand experiment considers only partial equilibrium
The spreading of health insurance may play a bigger role because market-wide changes in health insurance can fundamentally alter the nature and character of medical practices
Other Specifications (I)
ijtstzt
ztttjjijt
XtMcareimpact
tMcareimpactYearcountyy
)*)1965((
)*()(1*)(1*)log(
2
1
Other Specifications (II): Market Level
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ztttmmmt
XtMcareimpact
tMcareimpactYearmarkety
)*)1965((
)*()(1*)(1*)log(
2
1
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XtMcareimpact
tMcareimpactYearmarketyE
)*)1965((
)*()(1*)(1*))(log(
2
1
The Medicare impact is even larger when measured at the market level than hospital level
Total expenditure: 37 percent (~ [exp(0.083x5x 0.75)-1])
Partial Equilibrium v.s. General Equilibrium
The earlier estimates is about six to seven times larger than RIE would suggest
Fixed Effect Hypothesis
Aggregate changes in health insurance may sufficiently change the nature and the nature and magnitude of the market demand for health care that alter the incentives for hospitals to incur the fixed costs of entering the market or of adopting new practice styles.
Entry and exit Adoption of new technology
Spillover Hypothesis
Change in insurance of one set of patients can have spillover effects on other patients
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