The costs of coverage

Why does increased health insurance lead to increased health spending? One factor is that when individuals have insurance, they tend to consume more health care. This makes sense: If you only have to pay some fraction of the cost, you are more likely to go for an extra doctor's visit or get an additional diagnostic test than when you have to pay the full cost out of pocket.

Another reason is that hospitals and doctors respond to the increased demand for health care by changing some of the ways in which they practice medicine. For example, hospitals were more likely to adopt new medical technologies after Medicare was introduced because now, with greater insurance coverage, there were more people who could afford these new technologies. This in turn may have encouraged the development of a new generation of health-care innovations. All of this contributes to higher health-care spending.

Medicare did not have any effect at reducing elderly mortality in its first 10 years of existence. While the health benefits from Medicare therefore remain uncertain, we found clear evidence of a different type of benefit: It provided substantial financial protection to the elderly. This is the goal of insurance -- not to prevent an awful event from occurring, but to make sure that if it does occur you are not devastated financially.

The Medicare experience offers valuable lessons for today. Recent state efforts to create universal health-insurance coverage would reduce the fraction of the population in a state without insurance by similar amounts as did the introduction of Medicare nationwide. And if that program is any guide, we may perhaps see changes in the structure of the health-care system, such as the development and adoption of new medical technologies. We are likely to witness an improvement in the financial security of the currently uninsured. There are also likely to be increases in health-care spending -- quite possibly substantial ones.