Medicare Benefits Wealthy Most

Wealthy enrollees pay more into Medicare than poorer people do (in the form of general federal tax revenues and payroll taxes). However, they reap greater benefits over their lifetimes because they live longer and use more medical services.

Hear the phrase "Medicare beneficiary" and you might picture someone counting pennies in a modest house or apartment. Think again. According to a study recently published by the National Bureau of Economic Research, those who benefit the most from Medicare are the wealthiest older Americans, not the poorest ones.

In The Incidence of Medicare (NBER Working Paper No. 6013), Jonathan Skinner and Mark McClellan find that while all current Medicare enrollees are getting much more out of Medicare in benefits than what they paid into the program in taxes, the windfall is greatest for the wealthy. Wealthy enrollees pay more into Medicare than poorer people do (in the form of general federal tax revenues and payroll taxes). However, they reap greater benefits over their lifetimes because they live longer and use more medical services, the paper finds.

Skinner and McClellan begin by calculating how much Medicare spends, over a lifetime, for each of a random sample of approximately 1.4 million elderly Medicare beneficiaries, for both Part A (hospital) and Part B (outpatient and physician) benefits. Using zip-code level income data from the 1990 U. S. Census, they sort the beneficiaries into ten income brackets to figure how income level correlates with length of life and lifetime Medicare expenditures. They use a different data source (The Panel Study of Income Dynamics at the University of Michigan) to track accumulated Medicare tax payments since 1966 (the birth of the program), again for each of these ten income brackets.

Not surprisingly, they find that all those currently on Medicare are expected to receive over their lifetimes much more from the system than they paid into it. What is surprising is that these net gains are greatest for the upper income brackets. For example, the second-highest income decile has a lifetime net gain of $18,900, while the third-lowest decile has a lifetime net gain of $15,500. In other words, the Medicare program effectively transfers money from low to high income groups.

One proposal for Medicare reform is to provide vouchers to each Medicare enrollee; the vouchers could then be used to purchase a minimal level of health insurance. Those willing to pay more could buy supplemental insurance coverage out-of-pocket. McClellan and Skinner estimate that such a plan would still result in high income elderly consuming more health care, but (unlike under the current Medicare system) these high income people would bear more of the extra cost.