Health insurance reform: The impact of a Medicare buy-in

The steady-state general equilibrium and welfare consequences of a Medicare buy-in program, optional for those aged 55-64, is evaluated in a calibrated life-cycle economy with incomplete markets. Incomplete markets and adverse selection create a potential welfare improving role for health insurance reform. We find that adverse selection eliminates any market for a Medicare buy-in if it is offered as an unsubsidized option to individual private health insurance. The subsidy needed to bring the number of uninsured to less than 5 percent of the target population could be financed by an increase in the labor income tax rate of just 0.03-0.18 percent depending on how the program is implemented.