The Pros and Cons of Medicare and Medicaid in an Uncertain Economy

An overview of major advantages and disadvantages of the U.S. Medicare and Medicaid programs during a period of high economic uncertainty.

The ongoing debate over medical care reform calls for a re-examination of the economic advantages and disadvantages of Medicare and Medicaid. Between these two programs, our federal and state governments currently assist particular segments of the population with certain aspects of their medical needs. Medicare is a Title XVII federal program that provides hospitalization insurance, voluntary supplemental medical insurance, and prescription drug benefits to people over age 65, and to disabled individuals under 65 who have already received Social Security benefits for 24 successive months. Medicaid is a Title XIX federal and state partnership program providing a variety of financial assistance, including medical coverage, to aged, blind, disabled and financially disenfranchised adults with dependent children. This program is co-funded by the federal and state governments, but each state’s level of participation is determined by its own budget, so eligibility and coverage benefits differ substantially from state to state.


Medicare program funds are generated from the collection of U.S income taxes, and from payroll taxes on all U.S. employees and employers. Approximately 44 million individuals currently receive Medicare benefits. The current 1.45% Medicare tax rate for both employees and employers is projected to soar in the near future, based on the anticipated needs of approximately 76 million ‘baby boomers’, born between 1946 and 1964, who are anticipated to begin retiring in 2011. Recipients may elect to pay for additional, partially-covered benefits, including medical office visits and prescription drugs.

The economic impacts of Medicare are both good and bad, no matter what your party affiliation may be. On the positive side, the current program supports the medical needs of tens of millions of older and disabled Americans, allowing them to direct often-minimal disposable income toward other personal necessities, like rent and mortgage payments, food, transportation and utilities. Medicare’s assistance allows a substantial number of needy recipients to subsist above the poverty line, by covering the majority-cost of hospital bills and, in cases where additional voluntary coverage is present, prescription drugs and physician visits as well. In more well-to-do households, remaining disposable income is often directed toward non-essential products and services, allowing many retirees to pursue lifestyles they may have planned and saved for all of their working lives. Middle to upper-income retirees play an integral role in consumer spending, and their collective consumption definitely impacts the GDP in a positive manner.

On Medicare’s down side, likely payroll and employment tax increases will not be adequate to finance the immense need resulting from the upcoming onslaught of baby boomers, and major federal reform of the program will undoubtedly be required to preserve it. Unless Medicare is replaced by a new form of nationalized medical coverage, many of its benefits will likely be lost to enable the sustainment of others.  The federal deficit will need to deepen considerably to sustain the ballooning program, negatively impacting the GDP on the government spending side. In addition to higher taxes, recipients will likely pay considerably more for supplementary insurance programs that are adjusted to fill in the gaps left by the marginalized program. These changes will, in turn, require more funding from disposable income, thus lowering consumer spending, negatively impacting demand, interest rates and the consumer portion of the GDP. Recipients who rely solely on Medicare to fund their medical costs may be so negatively impacted by additional financial responsibility as to effectively slip below the poverty line.

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