How Much Is Medicaid Really Worth to Beneficiaries and Taxpayers?

Published July 21, 2015

One of the most important components of Obamacare is its expansion of Medicaid.

In those states that have done it, the additional cost to taxpayers has totaled billions of dollars. Is this expenditure worthwhile? What if instead of giving people Medicaid insurance, we offered them cash?

A new study says beneficiaries prefer the cash. In fact, if you offered the Medicaid population a little more than 20 cents on the dollar, the average enrollee would take the cash.

In their study, researchers Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttner, three of the nation’s premier health economists, examine the new evidence from the Oregon Medicaid expansion, an event that has provided social scientists with a wealth of data not previously available.

The authors conclude the uninsured are not really uninsured. Instead, they are insured “implicitly.” When they get medical care, they don’t pay the full price. Several previous studies estimate the uninsured pay about 20 percent of the cost of their care. But if this is generally true and if the uninsured know it is true, they know the cost to them when they seek medical care will be 20 percent.

Value, Cost-Determined Consumption

Put another way, the uninsured have an implicit insurance contract with a 20 percent copayment. A general economic principle that covers all insurance is patients will tend to consume care until its value to them is worth its cost to them. So if health care costs a patient 20 cents on the dollar, the patient will tend to consume it until it is worth 20 cents on the dollar.

In the Oregon Medicaid expansion, those who remained uninsured spent about $2,700 per person each year on medical care. Those newly enrolled in Medicaid spent about $3,600, or $900 more. This is consistent with economic theory. When $1 of care becomes free instead of costing 20 cents, people obtain more of it. But the value of this additional care is likely to be less than 20 cents on the dollar.

There were 75,000 people on the waiting list for Medicaid coverage in Oregon. Of these, about 35,000 were selected by lottery. Since the enrollees were selected randomly, those with Medicaid and those who remained uninsured were separated only by chance. This created an ideal experiment in which social scientists were able to study the effects of Medicaid.

Additional Care Has Little Effect

One finding that has already been widely reported is even though Medicaid expansion led to more consumption of health care, the additional care appears to have had little effect on the enrollees’ physical health. A finding that was not widely reported is 40 percent of those who were offered Medicaid coverage didn’t bother to enroll.

Yhat is consistent with national, pre-Obamacare data that show one-third of those eligible for Medicaid nationwide don’t enroll. It is also another indication the value of Medicaid to the recipients is well below its taxpayer cost.

This is not the whole of the story. If the uninsured are paying only 20 percent of the cost of their care, somebody else must be paying the other 80 percent. The study by Finkelstein and her colleagues found 60 cents of every dollar of Medicaid spending benefitted  “somebody else.”

However, the study did not identify who benefited from the 60 cents.

There is lengthy literature in health economics that tries to pin this down. A common belief is the cost of unpaid medical bills is shifted to other patients. But if other patients don’t bear the costs, who does? Taxpayers? Providers? This is obviously a question that needs to be answered.

In any event, it appears these unidentified non-impoverished people get three times as much benefit from Medicaid as the enrollees themselves.

John Goodman ([email protected]) is a senior fellow at the Independent Institute. An earlier version of this commentary originally appeared at Forbes. Reprinted with permission.

Internet Info:

Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttme, “The Value of Medicaid: Interpreting Results from the Oregon Health Insurance Experiment,” Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttme: