Medicare has since its creation in 1965 been the American government's second-largest social program - trailing closely behind Social Security. The origin of the system can be traced back to the 1960s, when President Lyndon B. Johnson declared the nation's "War on Poverty". Some schemes he helped create aimed at providing a "safety net" for the needy, this while other programs sought to improve the economic opportunities of the disadvantaged. Medicare belongs to the former group, yet does now face an uncertain future, this 35 years after its creation. We will later discuss the threats facing Medicare, mainly concerning the general ageing of society, and see that many developed countries are facing similar challenges. Yet, before doing so, it is essential to discuss the current system and how it has worked until now, this in addition to determining who is paying the costs and who is enjoying the benefits.

Medicare is currently available to U.S. residents from the time they turn 65, this regardless of whether the recipient is retired or still working. A proposal to raise the eligibility age for the health program was ruled out by the House in 1997, and the financial future of Medicare will consequently have to be extended by other means. The program is composed of two parts:

Medicaid, established in 1966, is another program that should be mentioned. It provides medical assistance to the poor, medical care to the disabled and nursing home care to a large proportion of the aged. The federal program is independent of Medicare, and eligibility is determined at the states' discretion. Medicaid covers approximately 36 million low-income individuals, including 18 million children, and the total outlay in 1997 was 163,013 million dollars. We will soon see significance of Medicaid in relation to the shortcomings of Medicare.

This paper will to a large extent refer to the findings from the Kaiser/Commonwealth 1997 Survey of Medicare Beneficiaries, a survey that included telephone interviews with 3,300 non-institutionalized Medicare enrollees. When the survey was taken, 34 million elderly Americans as well as 5 million permanently disabled beneficiaries under the age of 65 were insured under Medicare. This number seems insignificant when compared to the 77 million "Baby Boomers", who are beginning to reach retirement age. At the same time as the number of retirees increases, the workforce that supports the program with taxes will shrink. Financing of Medicare in the future is thus becoming a major issue, this as current figures suggest the program can only be financed in its current form until around 2015. Yet there are several other interesting issues concerning the Medicare program, and discussing these becomes even more interesting in light of the findings of the above mentioned survey.

Let us first discuss the distributional consequences of the Medicare program, this to identify the incidence of the program. Even though it is obvious that the elderly benefit from the program, it is equally true that the families of the beneficiaries also gain economically from the existence of the program. Understanding this point is easy if one tries to imagine who would have paid the medical costs if they had not been covered by Medicare. It is obvious that family members would have to split the costs, this to make sure their parents or grandparents will not end up in a situation similar to that of the elderly women that can be encountered on the streets in Russia. On the other hand, some people who retire have saved up more than a sufficient amount of money, and would therefore be able to make ends meet even if it weren't for access to Medicare. Yet, even though the image of he wealthy and healthy retiree is enchanting, the Kaiser/Commonwealth Survey found that one out of three beneficiaries lives on an income below 200 percent of the poverty level. A corresponding number also reported health problems. There are several other important characteristics concerning the incident of Medicare.

Perhaps it does not come a surprise that beneficiaries with low incomes are more likely to suffer from health problems than high-income beneficiaries are. This does obviously show that it to a certain extent is possible to buy oneself good health, and the survey did additionally show that those with health supplements in addition to Medicare to a large extent find it easier to get needed care than those without supplements. Still, less than 3 percent of Medicare beneficiaries did on the other hand report that they did not get needed care, a result that shows Medicare's popularity among the general public. We can thus conclude by saying that poor individuals should gain more from Medicare than do wealthier ones, this even though access to health services of course is better for those who are able to pay more. A sad fact is that the poorest segments of the population usually do not have the funds to enroll in Medicare, and the many of the Medicare programs are therefore often referred to as middle-class entitlement programs. Approximately 1 out of 6 Americans is not insured at all, but those who are uninsured are often covered by Medicaid.

Since even the uninsured end up getting care, we say that they receive uncompensated care. This does evidently send a signal to those who are enrolled in Medicare, a signal saying that one can survive without paying one's insurance. While this is a moral problem, it is considered an even bigger one to simply leave people to die, and this is yet another example where economic policies have to deal with value questions.

Another issue concerning Medicare is the problem of preference revelation. An individual can express his preference for a particular private good, this by simply either buying or not buying it. Still it is much more difficult to express one's view for a public good, this as one during an election is not able to convey one's view on a specific government program. There are thus probably many that are opposed to the Medicare system, yet this does not matter if your fellow countrymen have already decided on the issue in a collective manner. Kenneth Arrow, a Nobel laureate of Stanford, showed through the theorem referred to as Arrow's impossibility theorem, that it is impossible to satisfy all the characteristics needed for a democracy to be considered truly democratic. There is in other words no voting rule that will always accurately reflect the majority's wish on a particular issue. Yet, it is easy to see why Medicare is popular with the general population.

The American government does currently finance a larger share of personal health care expenditures than it has done earlier. While the government's share in 1970 was only 35,3%, it financed 44,6% in 1997. Medicare is as earlier described composed of two parts, yet the contributions made to Part B of Medicare only cover around a quarter of the total costs. Medicare subscribers are thus heavily subsidized by the government, this as the last three-quarters are paid by the government through ordinary tax revenues. If one considers this fact, it is easy to see that Medicare must be an unbeatable competitor on the insurance market. Medicaid, a program fully financed by federal and state money, is obviously an even more extreme example illustrating what can be called unfair competition. Yet there are reasons why a public program as Medicare can be highly effective.

First we have the issue of imperfect information. Insurance companies have to evaluate each patient individually, this to reach an agreement on a suitable insurance deal. They therefore have to rely on doctors to determine what procedures are necessary and useful, but the patient is usually bound to know more about his health condition than what the insurance companies are. Consequently, imperfect information is a serious obstacle in an otherwise competitive market. Yet, there are several other issues that make competition difficult in the medical service market. Obviously it is not always advisable to advertise low prices. Doing so can give the impression that a hospital or a doctor sacrifices safety and quality to enable himself to treat more patients, a signal that is unlikely to attract many customers. The Kaiser Commonwealth Survey confirmed this assumption by pointing out that Medicare beneficiaries with low incomes or health problems are less likely to rate their care or physician as "excellent". Additionally, there is another factor that makes private competition on health services less than ideal.

There wide range of health services available, sometimes for diseases that only afflict a few individuals each year, contribute to making pricing of health services difficult, and consequently limits the number of health service suppliers on a the market. While it can be easy to set a standard price for certain eye surgeries and such, many requested health services require specialists with particular knowledge in the field. An additional problem would be if hospitals focus on a certain range of surgeries to the extent that more specialized health services become unavailable. Norway's private hospitals do partly for this reason specialize on a set of fairly standardized operations, this while the public hospitals take care of the rest. All of the Scandinavian countries are certainly influenced by what is known as specific egalitarianism, in other words the idea that there are certain goods and services which availability should not depend on the income of the customer. Health care is obviously one of these, yet the thinking of specific egalitarianism does not stand very strong in the U.S. Politicians and economists alike think very differently on this issue, even though Medicaid is a sign that the view gained some ground in the 1960s.

The American government certainly did not have profit in mind when it created Medicare, and has rather subsidized the program with large sums since its creation in 1965. The absence of profit should in theory make health services cheaper, yet there are also those who will argue that the non-profit thinking makes for instance hospitals less effective, and points to that the leading U.S. hospitals usually are in the game for profits. An example of this is the for-profit chain Humana, which commonly is known as one of the most innovative operators in its field.

We have briefly discussed how Medicare costs have increased over the last couple of decades, and Americans spend relatively more on health care than do most other countries. As already mentioned, this trend is bound to continue as America's 77 million baby boomers start reaching retirement age. There are basically two different proposals that aim to finance Medicare well into the next century, and thus save Medicare from the bankruptcy it is facing in around 15 years.

One proposal argues for a reduced government role with greater reliance on private insurance and tax-free savings. If private payments are increased, the hope is that the dead-weight loss concerning the demand for health services will be reduced. An individual covered by either Medicare or Medicaid will not have to pay the full costs of health care, and the quantity of health care services consumed is consequently likely to increase. In relation to this we also encounter what we call the moral hazard problem. A big worry of the insurance industry is, as already mentioned, that insurance increases the likelihood of whatever was insured against. Something similar can be observed when it comes to preventive care. Medicare does for instance cover flu shots in full, and 64% of the respondents surveyed had thus received a flu shot. It is perhaps unlikely that as many would have paid for this preventative measure themselves, but Medicare's full coverage of the vaccination obviously encouraged many to take the shot. In the case of the flue shot, and similar preventive care services as mammography, it can prove economically beneficial to vaccinate people, this in contrast to having people take days off work when getting sick. Yet, it proves the point that reduced costs for the consumer will lead to increased demand, and one should therefore be able to lower demand by rising prices. The latter can be done by giving the users a larger part of the expenditure, thereby minimizing the above mentioned dead-weight loss

A related proposal to the above idea of less government control was developed by Sen. John Breaux (D-LA), and presented in March 1999. His plan would have given private health plans greater control over the nation's health insurance program. Patients would under the system be given money to pay insurance premiums, and the government would on its hand cease to pay patients' bills directly. The idea behind the proposal is that this reform would lead to greater customer awareness, and thus increased competition and effectiveness. The same panel, which was co-chaired by Breaux, also suggested to gradually raise the eligibility age for Medicare from 65 to 67. A similar proposal was turned down by the House in 1997, and the large budget surplus will probably stop the proposal from being passed in an election year.

Critiques of less government control over Medicare warn about reduced benefits in the competitive era of managed-care health plans. Still, if the government can not pay the increased Medicare costs any longer than 2015, and beneficiaries are not to pay a bigger part of the share, there is only one option left; Taxation. Japan, in addition to many other developed countries, are facing problems very similar to those of the U.S. A Japanese government advisory panel on taxation recently planned to recommend a 300% consumption tax increase in its triennial proposals unveiled July 14, but reportedly decided not to do this due to an understandable fright for a lack of public understanding. Currently the consumption tax is 5 percent, yet the panel thinks only a hike to 20% will be sufficient to meet challenges such as the graying of society, structural reform and economic recovery. All Western countries, except the United States, have a higher consumption tax than Japan. It is for instance 23% in Norway, this while the American government functions without a central consumption tax. Irving Fisher, a distinguished American economist, argued early this century that it is more appropriate to tax individuals on the basis on what they take out of society, this compared to taxing them for what they contribute. The philosophical argument saying that taxing consumption is equivalent to taxing lifetime income is perhaps another argument for an increase of the consumption tax. On the other hand, many economists consider the consumption tax to be regressive, this as rich individuals tend to save a larger fraction of their income than poor people do. Politicians leaning towards increasing the consumption tax will have to consider issues like these, and especially Prime Minister Mori of Japan should give this a good thought. An increase of the consumption tax is believed to decrease demand in the market, thus potentially making the consumer demand even more depressing than what is the case in present day Japan.

The Kaiser/Commonwealth Fund 1997 Survey of Medicare Beneficiaries concluded by saying that the Medicare program enjoys wide popularity among beneficiaries. I want to conclude by saying that just this fact is a major obstacle to reform. Most Americans are satisfied to the point they do not want any changes, and reaching a majority in congress will thus be difficult, this as unpopular decisions will have to be made if Medicare is not to face bankruptcy. Bill Clinton promised in his January 1999 State of the Union address to devote 15 percent of the anticipated budget surpluses over the next 15 years to Medicare, a measure that will lead to an estimated subsidy of 700 billion dollars. This is evidently not likely to be enough, and American politicians do therefore soon have to join their counterparts in Europe and Japan to decide on the future of their health care services.

I want to conclude by saying that even though the future of Medicare certainly seems unclear, the program seems so popular that no politician will let it go bankrupt. Any visitor to Russia will see what can happen if a country's welfare system falls into pieces, and most developed economies should have the funds to prevent a similar situation from happening. Politicians in Japan, Europe and the U.S. may not be able to help the hungry grandmothers in Russia, but the former should at least be able to take care of their own elderly.  

"Panel Eyed 20% Consumption Tax." The Japan Times 25 July. 2000: 14.

Stiglitz, Joseph E. Economics of the Public sector. New York: W. W. Norton Company, 2000.

Schoen, Cathy. "Medicare Beneficiaries: A population at risk." The Commonwealth Fund. 1998. 23 July. 2000