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A Note on Income Effects and Health Care Cost Growth in Medicare

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  • McGuire Thomas G.

    () (Department of Health Care Policy, Harvard Medical School, 180 Longwood Ave, Boston, MA 02115, USA)

Abstract

This paper sets out a model of technical change and health care cost growth for a representative Medicare beneficiary facing a budget constraint. Derivation of an explicit expression for health care cost growth shows how technological change and preferences, including income effects, affect cost growth. The analysis highlights the role of the 76% subsidy from current taxpayers to Medicare beneficiaries for purchase of health insurance. This subsidy insulates beneficiaries from the income effects of cost growth by shifting the costs and income effects to taxpayers. Simulations show that over the next 10–20 years, income effects will have little effect on cost growth in Medicare.

Suggested Citation

  • McGuire Thomas G., 2014. "A Note on Income Effects and Health Care Cost Growth in Medicare," Forum for Health Economics & Policy, De Gruyter, vol. 17(1), pages 1-12, January.
  • Handle: RePEc:bpj:fhecpo:v:17:y:2014:i:1:p:12:n:3
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    References listed on IDEAS

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    4. Fogel, Robert W., 2009. "Forecasting the cost of U.S. Health Care in 2040," Journal of Policy Modeling, Elsevier, vol. 31(4), pages 482-488, July.
    5. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
    6. Glazer, Jacob & McGuire, Thomas G., 2013. "Making Medicare advantage a middle-class program," Journal of Health Economics, Elsevier, vol. 32(2), pages 463-473.
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