Dr Jeremy McCauley’s research reveals how different income groups pay for – and use – Medicare and Medicaid. His data could shape critical funding reforms.
By Michelle Kilfoyle.
As average lifespans creep up, and citizens expect ever-better healthcare, governments around the world face mounting healthcare costs.
‘It’s just not clear how they’re going to pay for healthcare going forward,’ says Dr Jeremy McCauley of the School of Economics. ‘Funding reforms are essential.’
And, as he explains, an important foundation for reform is finding out which groups in society gain the most from public healthcare. But also, who pays the most towards it through taxes and insurance.
McCauley’s research explores this critical policy question for the US. It focuses on older generations, who account for a third of all medical care. And his findings so far have uncovered a few surprises on who really benefits from the programmes Medicare and Medicaid. Is it the rich or the poor?
Rising costs of Medicare and Medicaid
The government-sponsored Medicare and Medicaid provide public healthcare in the US (See Table 1). Responsible for 40% of all US medical spending, their costs are set to soar in the next few decades.
Government figures estimate that US spending on major health care programs (which are primarily Medicare and Medicaid) will rise to 8.8% of GDP by 2052, up from 5.8% in 2022.
But despite the programmes’ expense, we know little about who they benefit the most. ‘The government needs this information to work out who should pay more towards their healthcare,’ McCauley explains. ‘And who should be eligible for more support.’
| Programme | Description | How is it funded? |
| Medicare | Supports healthcare costs for those aged 65+, plus younger people with a disability. | Individuals pay a Medicare tax on their income throughout their working lives and insurance premiums in retirement. |
| Medicaid | For citizens of all ages on a lower income. Provides healthcare services at little or no cost.
|
Individuals pay towards Medicaid indirectly through federal income taxes and state taxes on businesses. |
Table 1: Medicare vs. Medicaid
First US data on redistribution of healthcare funds
In the first study of its kind, McCauley and colleagues from UCL, the University of Cambridge and the Federal Reserve Bank of Richmond analysed healthcare and income data for 8,777 US households whose head turned 65 between 1999 and 2004.
In this US Social Security Administration-funded research, they estimated the balance between how much these households paid into healthcare over their lifetimes and how much they ‘took out’ in services from the age of 65 until death, based on 1999-2012 data.
The researchers also measured differences between income groups to learn whether the programmes redistribute wealth, specifically whether taxes from the wealthy help finance the healthcare of less fortunate groups.
A funding deficit for all income groups
The team found the schemes had moved some funds towards the poorest in this cohort. But, critically, nobody came close to covering the cost of their healthcare in older age. The average shortfall was $220,000 per person.
And so, whether rich or poor, everybody’s healthcare had been heavily subsidised by younger generations.
Some income groups cost healthcare services much more than others, however (see Table 2). Thanks to their – typically – good health, wealthier US citizens live longer than the poorest members of society. Among those who surpass 65, wealthy and middle-income individuals live to 84, on average, compared with 81 for the poorest.
This longer life means that they clock up more use of healthcare services – particularly the very expensive ones that come with older age, such as nursing home costs.
And so, despite their good health, the richest 20% of the cohort received Medicare and Medicaid benefits worth 1.7 times more than those received by the poorest 20%. While the wealthiest offset 62% of these costs through contributions, ‘maybe they need to pay even more,’ McCauley suggests.
| Income group | Lifetime contribution to Medicare and Medicaid, per person | Value of healthcare received aged 65+ | Funding gap per person |
| Richest 20% | $248,000 | $401,000 | $153,000 |
| Middle 20% | $82,000 | $337,000 | $255,000 |
| Poorest 20% | $33,000 | $229,000 | $196,000 |
Table 2: Contributions and benefits for richest, poorest and middle-income quintiles
Surprisingly, however, it is the middle-income earners that benefit the most, in that they cost the most on balance. ‘The more controversial thing may be that it is the people in the middle who have to pay even more still,’ adds McCauley.
While the middle 20% of earners typically live longer than low earners, they contribute a much smaller proportion – just 24% – towards their healthcare costs than the richest do. This leaves a huge shortfall of $255,000 per person.
Building a bigger evidence base for sustainable medical spending
McCauley continues to analyse data from more recent generations. He plans to find out if healthcare funding has become more redistributive over time, and what difference it would have made if different income groups had paid in more.
By looking at healthcare systems in other countries, including the NHS, he also hopes to pinpoint the features that drive redistribution: ‘Because if we don’t better understand medical spending, and if there aren’t reforms, healthcare will end up dwarfing the rest of public spending.’
See all the data from this study so far.
Find out more about Jeremy McCauley’s work and publications.
Discover more research from the School of Economics on our website.