Medicare was established in 1965 to guarantee elderly Americans access to quality health care regardless of their financial circumstances. Medicare spends more than $200 billion a year and it will increase, partly because greater numbers of Americans will become eligible for coverage when the baby boomers begin to turn sixty-five after 2010. According to the article The Political Economy of Medicare by Bruce C. Vladeck, to understand the political economy of Medicare it is necessary to view it from three perspectives. The first one is Medicare as redistributive politics, second is Medicare as special-interest politics, and third is Medicare as distributive politics. In the next few paragraphs I will focus on economic analysis of Medicare system described in this article.
Much of the discussion about the Medicare as redistributive politics relies on the fact that Medicare is a “mildly progressive income-transfer program." Medicare funding comes from four major sources: payroll taxes, income taxes, trust fund interests and enrollee premiums. As Vladeck stated in his article, Medicare helps in reducing poverty for the elderly and disabled by just transferring income from working-age persons to retired or disabled former workers. There are two parts in financing of Medicare. Part A (hospital insurance) comes from payroll taxes paid on and by all workers in the U.S. labor force. Individuals who have paid into the social security system for ten years are automatically enrolled in Part A upon reaching their sixty-fifth birthday. If the individual uses hospital treatment, he or she will pay a deductible equal to the cost of the first day in the hospital; Medicare will pay for days 2-60 with no coinsurance requirements; days 61-90 would be covered but the patient must pay coinsurance equal to 25 percent of the deductible; and days 91-150 would be covered if the lifetime reserve days are available with the patient paying coinsurance equal to 50 percent of...
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