The Effects of Medicare on Medical Expenditure Risk and Financial Strain

Medicare offers substantial protection from medical expenditure risk, protection that has increased in recent years. At age 65, out-of-pocket expenditures drop by 33 percent at the mean and 53 percent at the ninety-fifth percentile. Medical-related financial strain, such as difficulty paying bills and collections agency contact, is dramatically reduced. Nonetheless, using a stylized expected utility framework, the gain from reducing out-of-pocket expenditures accounts for only 18 percent of the social costs of financing Medicare. This calculation ignores any direct health benefits from Medicare or any indirect health effects due to reductions in financial stress.