The Effects of Medicare on Health Care Utilization and Outcomes

Medicare, which provides health insurance to Americans over the age of 65 and to Americans living with disabilities, is one of the government's largest social programs. It accounts for 12 percent of federal on- and off-budget outlays, and in fiscal year 1999, $212 billion in Medicare benefits were paid. The largest shares of spending are for inpatient hospital services (48 percent) and physician services (27 percent). In thirty years, the number of Americans covered by Medicare will nearly double to 77 million, or 22 percent of the US population.
Perhaps the most important question we can ask about the Medicare program is, What impact does it have on the health of the US population? One feature of the Medicare program can be exploited to shed light on its impacts: its age specificity. Most people become eligible for Medicare suddenly, the day they turn 65. Consequently, the age profiles of health services utilization and health outcomes (morbidity and mortality) can provide revealing evidence about Medicare's impacts.
My objective is to obtain precise estimates of medical utilization and outcomes, by single year of age, for ages close to age 65. The most precise estimates can be obtained by using information obtained from medical providers (hospitals and doctors) pooled over several years.
Utilization of ambulatory care and, to a much smaller extent, inpatient care increases suddenly and significantly at age 65, presumably due to Medicare eligibility. The evidence points to a structural change in the frequency of physician visits precisely at age 65. Attainment of age 65 marks not only an upward shift but also the beginning of a rapid upward trend (up until age 75) of about 2.8 percent per year in annual visits per capita. The number of physician visits in which at least one drug is prescribed also jumps up at age 65. Reaching age 65 has a strong positive impact on the consumption of hospital services, but most of this impact appears to be the result of postponement of hospitalization in the prior two years.
We also examine whether this increase in utilization leads to an improvement in outcomes—a reduction in morbidity and mortality—relative to what one would expect given the trends in outcomes prior to age 65. The estimates are consistent with the hypothesis that the Medicare-induced increase in health care utilization leads to a reduction in days spent in bed of about 13 percent and to slower growth in the probability of death after age 65. Physician visits are estimated to have a negative effect on the male death rate, conditional on age and the death rate in the previous year. The short-run elasticity of the death rate with respect to the number of physician visits is –.095, and the long-run elasticity is –.497: a permanent or sustained 10 percent increase in the number of visits ultimately leads to a 5 percent reduction in the death rate.
Data on age-specific death probabilities every 10 years since 1900, i.e., before as well as after Medicare was enacted, provide an alternative way to test for the effect of Medicare on longevity. They also provide strong support for the hypothesis that Medicare increased the survival rate of the elderly by about 13 percent.