Is Medicare progressive in its impact?

Maybe not.

If just one assumption about Medicare’s distributional effects would seem to be safe, it would be that the system results in substantial progressive redistribution, or transfers from people who on a lifetime basis are high-earners to those who are low-earners. After all, everyone gets the same insurance coverage upon retirement, but during your working years you pay a flat rate tax, with the result that high-earners pay more.

Think again. Here are some reasons why wealthier people use Medicare more:

1. Wealthier people demand more health care and greater treatment intensity.

2. Wealthier people tend to live longer.

3. Wealthier people don’t mind Medicare copayments as much.

4. Wealthier people are more likely to live in or near major cities, where access to care is greater.

A variety of studies offer mixed results, but in general do not support the view that Medicare is progressive in its effects. Note, however, that these studies do not consider the distributional impacts of the recent Bush drug prescription bill.

The above is taken from Daniel Shaviro’s Who Should Pay for Medicare?, an excellent public policy study. You’ll be hearing more about this book soon.

My observations: The correct notion of progressivity would account for the value of benefits received, not just dollars spent. Of course this is harder to measure. In the meantime, the result suggests that partial privatization of Medicare, as would allow the wealthy to opt out, would not create an (additional) fiscal crisis for the rest of the system. That being said, if the wealthy are gaining on net, don’t be surprised if privatization doesn’t get off the ground. Furthermore the medical benefits of privatization will be correspondingly limited. The main benefit of privatization would be to stop Congress from spending the money in the mythical “lockbox.”


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