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9 November 2021

Is Medicare a Massive Subsidy for Insurance Companies?

by Florian

Let’s play with a counterfactual: Medicare was never created. There is no “socialized” medicine in the United States for the elderly.

What would happen in this alternate reality?

You’ll probably do most of your healthcare spending in the last 20 or so years of your life. This is typically where Medicare steps in and begins footing the bill. But, what if they weren’t?

A couple things seem pretty obvious to me, though, I could be wrong here.

  1. If Medicare isn’t paying for retirement healthcare, somebody has to. I don’t think we’d let grandma & grandpa go without healthcare in the most vulnerable years of their lives.
  2. It would be politically horrendous to surprise bill and jack up premiums for seniors. These aren’t poor people. They are some of the most politically active and vocal people. We tolerate all those fishy practices like unnecessary services, preexisting conditions, and so on for the young and healthy, but I can’t imagine we’d sustainably do the same for the elderly.

So, it seems like somebody would have to cover the 65+ cohort, and who would that be?

Insurance companies. Which they, really don’t want to do. Other than people with chronic conditions, old folks are the biggest cost for insurers. Medicare allows these companies to collect steady premiums (and profits) from the young and healthy and then right as those same people become old and unhealthy, Medicare starts picking up the tab.

In what way is this not a massive subsidy for insurers? They reap the rewards of the younger and largely healthy middle-aged cohort, and then they don’t pay out when the costs rise exponentially.

Again, this is all operating under the assumption that somebody would pay for them, and that may not be true. We could simply raise premiums as you age and force older adults into poverty and/or an earlier death. I find that extremely unlikely, and so, we built Medicare to pick up those costs and take them off insurance companies’ books.

From my naïve perspective, that looks an awful lot like a subsidy for insurers.

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