Free Trade in Health Care: The Gains from Globalized Medicare and Medicaid

Free Trade in Health Care

The Gains from Globalized Medicare and Medicaid

Dean Baker and Hye Jin Rho

October 2009

Center for Economic and Policy Research

1611 Connecticut Avenue, NW, Suite 400Washington, D.C. 20009202-293-5380www.cepr.net

CEPR Free Trade in Health Care: The Gains from Globalized Medicare and Medicaid

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Contents

Executive Summary.........................................................................................................................................1

Introduction......................................................................................................................................................3

The Mechanics of Globalized Medicare.......................................................................................................3

Potential Savings From Globalized Medicare..............................................................................................5

Potential Savings From Globalized Medicaid..............................................................................................9

Implications of Globalized Medicare and Medicaid for the Budget and Retirement Income...........14

Conclusion......................................................................................................................................................16

Appendix.........................................................................................................................................................17

Medicare.....................................................................................................................................................17

Medicaid and Dual Eligibles....................................................................................................................18

About the Authors

Dean Baker is an Economist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. Hye Jin Rho is a Research Assistant at CEPR.

Acknowledgements

The authors thank David Rosnick, John Schmitt, Shawn Fremstad, Nicole Woo, Alan Barber, andKris Warner for helpful comments.

CEPR Free Trade in Health Care: The Gains from Globalized Medicare and Medicaid

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Executive Summary

There are large differences between the per-person cost of providing health care in the UnitedStates and the per-person cost in other countries with comparable health care outcomes. In 2006,the per-person cost of health care in the United States was $6,714, while the average cost in the 26countries with longer life expectancies was $2,964. This gap suggests the potential for substantialgains from trade. This paper outlines a mechanism for taking advantage of these potential gains from trade: aglobalization of the Medicare and Medicaid programs. Since most of the beneficiaries of Medicareare retirees, as are a substantial portion of the beneficiaries of Medicaid, they need not live near a workplace. Many beneficiaries have family or other ties to other countries. The globalizationmechanism proposed in this paper would allow beneficiaries of these programs to have a voucherthat would allow them to move to other countries and buy into their health care systems, with thegovernment and the beneficiaries splitting the gains. To provide an inducement for other countriesto participate, they would receive a premium (e.g. 10 percent) above their costs to ensure that they benefit from this process as well. The projections in the paper show that:

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If 10 percent of Medicare beneficiaries opted to take advantage of this program, then by 2020, the government would be saving more than $9 billion a year (in 2008 dollars). (Thispaper uses 2008 dollars throughout, unless otherwise specified.) If 50 percent of beneficiaries took advantage of the program, then the savings in 2020 would be more than$40 billion a year. By 2030, the projected annual budget savings would have increased to$20 billion if 10 percent of beneficiaries took part and to $98 billion if 50 percent took advantage of this option. By 2085 the projected annual budget savings would have risen toalmost $290 billion with a 10 percent take-up rate and more than 1.4 trillion with a 50percent take-up rate.

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The gains to beneficiaries would be quite substantial, with larger gains accruing to those who opt to move to countries with lower health care costs. Beneficiaries moving to Spain would be able to pocket $10,900 in 2020, equal to 61 percent of the Social Security benefitfor a medium earner retiring at age 65 in 2020. Those who moved to Canada would get anadditional $5,600 a year to supplement their retirement income, equal to 31.3 percent of amedium earner’s benefit. By 2045, these sums are projected to increase to $26,700 and$22,600 a year, respectively. These gains are 22.6 percent and 3.8 percent above projectedSocial Security benefits for a medium earner retiring in 2045. In 2085 the gains frommoving to these two countries would be $74,700 and $77,500, respectively, both more thandouble the projected Social Security benefits for medium earners retiring in 2085.

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There would be even larger gains if retirees who are eligible for both Medicare andMedicaid opted to take part in this program. The total annual savings for both federal andstate governments from having a “dual eligible” move to another country in 2020 would be$12,100 per beneficiary. In 2045 the savings would be $29,400, and the annual savings in