Health Insurance Reform: The impact of a Medicare Buy-In

Current U.S. policy extends medical insurance in the form of Medicare to individuals aged 65 and over. Younger individuals may have group health insurance through their employer, purchase individual health insurance, or go without. The fact that many individuals have no insurance, or have relatively expensive individual insurance, is a motivation for health insurance reform. This paper evaluates the general equilibrium and welfare consequences of health insurance reform in a calibrated life-cycle economy with incomplete markets, uncertain lifespans, and endogenous labor supply. In particular, we consider a policy reform that would allow younger workers (aged 55-64) to purchase Medicare coverage. In our model, working age individuals face idiosyncratic productivity shocks, choose whether or not to work (labor is indivisible), accumulate claims to capital, and can purchase private health insurance if they do not receive group health insurance through their employer. Retired individuals receive social security and Medicare which, along with accumulated savings, is used to finance consumption and medical expenditures. Preliminary results indicate that adverse selection renders a Medicare buy-in program infeasible unless at least 40 percent of the costs of the program are financed through government subsidy.