Economic Growth and Medicare Funding Systems

Abstract

This article compares the long‐run effects of changes in health conditions, population growth, price of medical care, and Medicare indemnity rate on capital formation and medical expenditures under fully funded and pay‐as‐you‐go Medicare. Surprisingly, it is found that population growth, rising medical prices, and increasingly adverse health conditions may or may not raise medical expenditures in the long run. Moreover, the directions of some of these effects under the pay‐as‐you‐go Medicare system are reversed under the fully funded system. Finally, it is shown that fully funded Medicare results in higher steady‐state capital than pay‐as‐you‐go Medicare; however, the welfare effect of the former may or may not be higher than that of the latter in general. (JEL H550, E620)