Who Cares About Medicare?

July 15, 2012

At least everyone who has it cares, but who reallycares? Or, to look at this from an economic perspective, who places a higher monetary value on Medicare? That was the question Yale marketing professor Ahmed Khwaja set out to answer. Using a unique dataset from the Health and Retirement Survey, he constructed an interesting model that can monetarily identify the value placed on Medicare.  

 Says Professor Khwaja “My research in trying to understand why Medicare matters, and assess what benefits it may provide was motivated in part by what President Lyndon Johnson said in July 1965 when signing the Medicare Bill. His words made clear that he thought that Medicare was a program intended to provide much more than access to health care. President Johnson had stated, “No longer will older Americans be denied the healing miracle of modern medicine. No longer will illness crush and destroy the savings they have so carefully put away over a lifetime so they might enjoy dignity in their later years. No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations.”

Professor Khwaja’s major insight was that people don’t demand health insurance or health care per se. The demand for these services is derived from the underlying demand for ``health,” i.e., how much people care about their health or what level of health they demand for themselves drives their demand for health care . The second insight was that health insurance is a misnomer. Health insurance doesn’t really insure health in that it does not guarantee complete recovery of health in case of illness. It does however insure financial security in case of illness. In this sense it is unlike say, automobile insurance which does promise to make good on damage to an automobile, but very much like life insurance.

Hence, in modeling something as complicated as healthcare, not only should a variety of factors and their interplay be taken into account, but also that demand for health drives the demand for health coverage, and that health coverage is also about covering financial losses in case of illness. Without a properly specified econometric model, biases can easily creep in and distort the results. But once the model has been appropriately developed interesting insights emerge about this complicated and currently controversial topic.


Given the debt crisis faced by the country with Medicare being one of the main contributors to the projected fiscal imbalance, one of the solutions being floated to ensure the long term stability of the Medicare program is raising the age of eligibility from 65 to 67. While at one level it appears logical given the increase in life expectancy over the last several decades, what do the people who are about to enroll feel about it? Specifically, can we tell how much of a premium a person would be willing to pay to avoid the increase in the age eligibility? Yes, says Professor Khwaja, by running simulations using his model. What did he find?

On average, people are willing to pay about $39,000 (all numbers in 2008 dollars) to prevent the eligibility age from going up by two years (To get a sense of context, keep in mind that median household income was about $50,000). But averages can be deceptive. A closer look shows that those with less than a high school education and are white are willing to pay nearly $45,000. On the other hand, those with at least a college degree and who are neither black nor white are willing to pay only about $25,000. That is, all else being equal, the less educated are willing to pay more to avoid the delay in getting into Medicare. So, one way to look at this is that Medicare is seen as a much more valuable program by those who can least afford health insurance.     

That’s not the whole story, however. There are other nuggets we get from this approach to analyzing data. One of the more interesting is the stockpiling effect. People seem to stay away from getting medical care when they are very close to Medicare eligibility and then there appears to be a rush to get a lot of care once enrolled in Medicare. Once again this points to the value people place on Medicare as a generous program and a worthwhile goal to work toward. No wonder changes in Medicare eligibility or benefits is such a touchy subject!

But why exactly do individuals value Medicare so highly (i.e.) have such a high willingness to pay (even among the more educated)? According to the results of the model, it’s because it is useful over their lifetime, provides small improvements in health status and decreases in mortality rates, insures against medical expenditure and provides access to medical care. In other words, the value of Medicare is not that it necessarily leads to vast improvements in health or mortality. Those improvements are small. But by reducing medical expenses and providing access to care, it appears to provide substantial peace of mind and hence quality of life.  

So, Professor Khwaja’s model not only provides the answer to the question of “Who cares about Medicare?” (everyone, but especially those who can least afford health insurance), but also implies why (ultimately it provides peace of mind).    

Rajan Sambandam is a Knowledge Partner of the Yale Center for Customer Insights and Chief Research Officer of TRC Market Researchnew product development firm located in suburban Philadelphia.


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