Medicare, Medicaid, Medigap, and the Life Expectancy of the Elderly

Morris A. Davis - University of Pennsylvania

This paper asks the following question: what happens to the life expectancy of the elderly if Medicare and Medicaid become less generous? To answer this question, this paper develops a multi-period rational expectations model of the time-varying value that the elderly derive from various health care services. Using the framework of this model, this paper simulates the decisions and life expectancy of various cohorts of elderly under different regimes of Medicare and Medicaid generosity at parameter values thought reasonable.

At the chosen parameter values, without purchase of any health care, elderly aged seventy (of any means) can expect to live $7.8$ years, while if these elderly are forced to puchase all available health-care services they expect to live between $10.7$ years (poor elderly) and $11.0$ years (wealthier elderly). At current levels of Medicare and Medicaid subsidies, wealthier seventy year-olds expect to live $9.5$ years, and poorer seventy year-olds expect to live $9.37$ years. If the Medicare program is completely eliminated and the Medicaid program is almost completely eliminated, simulations predict the life-expectancy of the current generation of seventy year-olds decreases by $.37$ years for the poor and does not change for those wealthier.

Scheduled for Session 4.5 Problems In Public Finance - I