The Welfare Impact of Medicare HMOs

We estimate the welfare associated with the Medicare HMO program, now known as Medicare+Choice (M+C). We find that the creation of the M+C program resulted in approximately $15.6 billion in consumer surplus and $52 billion in profits from 1993 to 2000 (in 2000 dollars). This program most likely generated significant net social welfare. However, we find that consumer surplus is geographically unevenly distributed. Prescription drug coverage accounts for approximately 45% of the estimated consumer surplus for 2000. Consumer surplus increases in the number of plans in a county, and most of the increase in welfare is due to increased premium competition.