WHOM DOES MEDICARE BENEFIT

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DESCRIPTION (provided by applicant): Rapid growth in Medicare claims payments has transferred resources away from younger cohorts to elderly cohorts. Less clear, however, is the way in which Medicare redistributes resources within cohorts. While disadvantaged groups pay fewer Medicare taxes, they also tend to die earlier and receive fewer Medicare benefits. We propose to use several new data sources to investigate whether Medicare redistributes resources towards disadvantaged groups within a cohort, and whether it improves the welfare of any or all these groups. We will compare less educated people to the more educated, non-whites to whites, and smokers to nonsmokers. Our calculations will be based primarily on individual-level data on Medicare benefits from the Medicare Current Beneficiary Survey, and on individual-level longitudinal data on lifetime Medicare taxes paid from the Health and Retirement Study's Earnings History Files. Our approach differs from previous research in its use of individual-level data, which--unlike the previous studies of geographically aggregated Medicare claims data--seem to reveal an extremely high degree of progressivity in Medicare. Our data suggests that disadvantaged people--who are sicker--receive more Medicare benefits, even though average Medicare claims are higher in richer areas. As a result, the cash value of Medicare seems to be higher for poorer groups. We propose at least two reasons for this result: health care price levels are higher in richer areas, so that geographic variation in health care expenditures can be misleading; in addition, richer areas will tend to have better health care facilities and will thus attract sicker people. We propose two distinct methods for calculating welfare effects: the first, less structural approach yields a lower bound on the benefits and progressivity of Medicare; the second, more structural approach yields both upper and lower bounds that are also likely to be tighter. Finally, our data can be used to evaluate the welfare impact of past policy changes-- such as the repeal of the Medicare earnings cap--and proposed policy changes--such as a Medicare prescription drug benefit, changes in the age of Medicare eligibility, or Medicare "buy-in" proposals.