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Abstract: I estimate the welfare provided by and net costs of the Medicare HMO program in 1999-2002. I measure welfare with a nested logit model of demand for Medicare HMO plans using detailed data on plan benefits. From this, I derive estimates of consumer surplus and find that total welfare provided by the program over the four-year period is about $61 billion (2000 $). I also use data on favorable selection enjoyed by Medicare HMOs to estimate net costs, which total about $21 billion (2000 $). Net welfare therefore totals nearly $40 billion and the return on spending is about 186%.

Keywords: Medicare, HMO, prescription drug benefits, welfare analysis, demand analysis

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