The Effects of Medicaid and Medicare Reforms on the Elderly’s Savings and Medical Expenditures

Published: 2010


We study a model in which retired single people optimally choose consumption, medical spending and saving while facing uncertainty about their health, lifespan and medical needs. This uncertainty is partially offset by insurance provided by the government and private institutions. We first show how well the model matches important features of the data and we analyze the degree of insurance provided by current programs. We then analyze the effects of some reforms, meant to capture changes in Medicaid and Medicare, on savings and medical expenditures.

Key Findings

    • We create a model to analyze the effects of recent changes in Medicaid and Medicare on out-of-pocket and total medical expenditures, and savings for retired single people.
    • Households in the lower income quintiles are much more likely to receive Medicaid transfers, but the transfers that they receive are on average relatively small.
    • Households in the higher income quintiles are much less likely to receive any Medicaid pay-outs, but when they do, these pay-outs are often very big and correspond to severe and expensive medical conditions.
    • Reforms to make Medicaid more generous reduce the elderly’s savings at all income levels, including the highest.
    • Reforms that reduce Medicare copays that elderly people incur when consuming medical goods and services benefit higher income people more than poorer ones, because the poor are already well-insured by Medicaid.