Mortality, Disability, and the Normative Economics of Medicare

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research

Volume Title: The Role of Health Insurance in the Health Services Sector Volume Author/Editor: Richard N. Rosett Volume Publisher: NBER Volume ISBN: 0-87014-272-0 Volume URL: Publication Date: 1976

Chapter Title: Mortality, Disability, and the Normative Economics of Medicare Chapter Author: Bernard Friedman Chapter URL: Chapter pages in book: (p. 363 - 390)

PART N

Health

THREE Insurance

-I

t

9

BERNARD

Mortal ity, Disability,

an d t h e N o r m at i ye

Economics of Medicare

ABSTRACT

Medicare subsidizes the purchase of health services by elderly persons. This paper supposes that several insurance alternatives may be compared, or experience monitored, using a social welfare function that recognizes gains from risk spreading, cash transfers, and improved health statns. A particular measure of welfare gain, an "equivalent transfer," is derived and applied to the Medicare experience.

Econometric analysis suggests that, owing to Medicare, some improvement in mortality and disability is evident in 1969. Whether these health improvements are "large" is a question for statistical hypothesis testing, but also it is a tractable question of parameter values in the equivalent transfer formula.

1. INTRODUCTION

Medicare is one of several conceivable programs for improving the opportunity for elderly persons to spread individual monetary risk.

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365

Each elderly person, under Medicare, is partially reimbursed for

certain expenses in what may be called a system of matching grants

conditional on validation by physicians and other health profes-

sionals. A matching grant, instead of a more neutral cash transfer, is

a natural instrument of policy by a central authority wishing to

partly overrule individually perceived values.'

This paper formulates the assessment of Medicare and some

limited alternatives by a central authority. Individual risk prefer-

ence and individual valuation of cash transfers are to be honored,

but the improvement of health status is taken to be a matter for

outside valuation.2 The relevance of such a formulation for applied

welfare analysis will be briefly discussed in this section. Then in

Section 2 a particular measure of welfare gain, an "equivalent

transfer," is derived. The application of this measure to monitoring

the early results of Medicare is sketched. The next two sections of

the paper apply econometric models for estimating improvements

associated with Medicare in mortality and disability.

S

The problem for statistical inference is the adequate specification

and testing of stochastic disturbance properties of age-specific

rates. Each age-specific mortality rate should not be treated as an

independent time series, since over time different individuals are

observed, with different histories appearing elsewhere in the data.

A related shortcoming is inherent in the cohort approach of

epidemiology--technology is dated in time, affecting different

cohorts at different ages. These two observations motivate the

statistical tests in Section 3. Mortality rates for ages in five-year

intervals, and for years at five-year intervals ending in 1969, suggest

a significant improvement for elderly white males associated with

Medicare. The result for older white women is less clear. Disability

rates for both elderly men and elderly women over the period

1959-1971 show meaningful improvements relative to younger per-

sons.3 Whether health gains are substantial is a question for statisti-

cal hypothesis testing and also a tractable question of parameter

values in the equivalent transfer formula.

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The volumes of expert testimony and position papers during the

early 1960s indicate that the purchase of additional medical care for

the elderly was regarded as a key social goal.4 Such a goal is

furthered more by Medicare than by either of the two following

insurance alternatives: (1) A floor on disposable income for

nonhealth consumption, implemented by a subsidy with a means

test; (2) A system of cash indemnities that "compensates" for health

impairment without encouraging the purchase of particular ser-

vices.

366

Friedman

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