Medicaid’s Crowding Out Effect

From the National Bureau of Economic Research comes this interesting study that Medicaid crowds out private health insurance. The authors of the study look at long term care for the elderly and arrive at several of interesting results.

  1. The presence of Medicaid is sufficient to explain why at least two-thirds of all households would prefer not to purchase private long-term care insurance.
  2. Medicaid imposes an implicit tax rate of about 60 percent for men (and 75 percent for women).
  3. The authors suggest that recent state and federal reforms designed to stimulate demand for private insurance are unlikely to have much impact because they fail to adequately reduce this implicit tax.
  4. Public provision of insurance has the potential to reduce total insurance coverage and thus to increase overall risk exposure.

The problem pretty much stems from the implicit tax that the authors discuss. Given this tax there is a heavy incentive to avoid private insurance. Further, these results are aside from the issues market failure.

One solution is to simply provide public insurance that provides complete coverage. The only problem with this is that this also creates problems. There are problems with people not saving for their long term health care and having it completely subsidized by the tax payers. Once this is happens there is no incentive to control costs on the part of the elderly recieving this subsidy. Add on that the elderly are a very powerful voting block and it could be a recipe for out of control budget deficits that make the recent binge spending by Bush look like a joke.

I think a better approach would be to give every person a fixed amount of money that can be used to purchase health insurance, say $2,000.1 This would still allow for market incentives to help contain costs (after all if I can find two policies that are identical save that one costs $2,200 and the other $2,000 I’ll go with the less costly option). On top of this make health insurance mandantory. Believe it or not there are people out there who don’t buy health insurance on purpose. I think we should basically make such behavior punishable (yes, as in, “I’m sorry, you are just too stupid on this decision so the act of making a decision has been taken away. Now, pick your health insurance or we’ll get really nasty.”)2 So, now there will be mandantory health care insurance and on top of it people will be helped with this purchase. No more uninsured and we can still get some decent market incentives.
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1We could tie the amount of the subsidy to income. For example, the $2,000 could be for a person who is at say 1.5x the poverty level (and lets assume the poverty level is $10,000). Thus if you make $16,000 a year you might get a subsidy of $1,950 or something like that. Structure it so that there is still an incentive to take a better paying job.
2Yes, I know that sounds a bit over the top, but when you think about it, this is basically the message of any and all nationalization schemes. If health care is nationalized you will have health care and you will pay for it (via taxes). The option of “opting out” will not exist at all because only those who know they are healthy will opt out leaving only the sickly in the system. So, if you are a liberal and this view shocks you, tough crap, this is what you have been aggitating for and I admit defeat. You win, this is what you get…without all the sugar coating that is.

FILED UNDER: Economics and Business, Health
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. EB says:

    Where is health care $2000 per year? Where I pay for mine, the cheapest I can find for INDIVIDUAL coverage is $460 per month. If it was only $2000 per year, I think more employers would offer it as a benefit, but as the cost is so prohibitive, it is no longer offered as a benefit in many jobs, and it is not affordable. Again, where is it $2000 per year? Maybe I can relocate.

  2. Anderson says:

    I’m no economist; please explain why a $2000/year subsidy won’t raise the price of health insurance by $2000.

  3. Damned stupid, irresponsible, non-rich people!

    Looks like Steve Verdon and Mitt Romney think alike. All those damned irresponsible people who don't buy health insurance need to be dealt with: Believe it or not there are people out there who don't buy health insurance on purpose. I think w…

  4. Maniakes says:

    EB, I can find individual private coverage for $40/month. But then, I’m a 23 year old nonsmoker in good health, and I shop for high deductable insurance (on the theory that I shouldn’t be paying to “insure” against things I can easily pay for out of pocket).

  5. Too Stupid to Make Your Own Decisions

    Steve Verdon knows how to run your life, and the state should punish you if you disagree:I think a better approach [to health care policy] would be to give every person a fixed amount of money that can be used…

  6. mike says:

    I know where we could find $5 billion a month to pay for it – the only hint is that the place is very sandy

    Seriously though – people would rather spend their money on anything but health care when they know that big gov’t is there to bail them out – if it were really enough to give folks $2k to invest for themselves then I would be all for it but I just don’t think the government can ever solve a problem let alone the health care problem.

    The gov’t needs to get out of hte health care business except emergency aid.

  7. Let’s do the same thing with transportation! Everybody should be ask to buy a car and given $10,000 to buy one. So that basically we get market incentives and nobody is left without a transporation! And we should punish somebody if they refuse to buy a car!
    Oh wait! You mean, some people might prefer to walk? Idiots! How dare they question my great wisdom?

    Is the similarily between walk and self-insurance clear enough?

  8. Steve Verdon says:

    Where is health care $2000 per year?

    Good gravey, I throw out a hypothetical number to illustrate a point and suddenly it is carved in stone. Get a grip and a clue EB.

    Further, what kind of insurance are you buying, a policy that covers everything including split ends?

    I’m no economist; please explain why a $2000/year subsidy won’t raise the price of health insurance by $2000.

    We are already subsidizing health care consumption massively as is. What I’m suggesting is we look for a better (i.e. cheaper) way of doing it; one that will still incorporate some market incentives to keep costs low. Also, the problem isn’t so much the current cost, although it is high, but the unsustainable growth rate.

    EB, I can find individual private coverage for $40/month. But then, I’m a 23 year old nonsmoker in good health, and I shop for high deductable insurance (on the theory that I shouldn’t be paying to “insure” against things I can easily pay for out of pocket).

    Bingo! We have a winner, somebody buy this man a lunch!

    I know where we could find $5 billion a month to pay for it – the only hint is that the place is very sandy

    I know another place, just scuttle Bush’s drug give away program.

    Let’s do the same thing with transportation! Everybody should be ask to buy a car and given $10,000 to buy one. So that basically we get market incentives and nobody is left without a transporation! And we should punish somebody if they refuse to buy a car!
    Oh wait! You mean, some people might prefer to walk? Idiots! How dare they question my great wisdom?

    Is the similarily between walk and self-insurance clear enough?

    No, because society isn’t always going to bail out those without a car, but we seem unable to resist the urge to help those who don’t buy insurance. So long as society is going to do this, we might as well try to make it work as best it possibly can. Wishing for something you’ll never be able to get is getting pretty close to insanity, IMO.

  9. Ryan Fuller says:

    And what if I don’t think that the benefit I’d get from insurance is enough to justify the cost? When it comes to insurance, most people lose. That’s how insurance companies stay in business. If you’re careful and take good care of yourself, you’re even less likely to come out ahead on your insurance costs vs benefits.

    Suppose I want to just put that money into some low risk, low yeild investment and keep it there in case of an emergency… who are you to tell me what to do with my own money?

    Other than the obvious gross market distortions that come about from forcing everyone to buy something, what you are proposing is somewhere between the nanny state and tyranny. The “right to make any decision you like as long as it’s the officially sponsored one” exists in every dictatorship in the world, and that’s exactly what you’re suggesting. The freedom to choose for one’s self includes the freedom to choose poorly, if that’s what the individual wants.

    As a side note, when you try to mix government compulsion and private markets and hope for market forces to produce an efficient result, the attempt fails. Typically this is called market failure, when the blame should properly be allocated to government intervention in the market.

  10. Michael A. Clem says:

    No, because society isn’t always going to bail out those without a car, but we seem unable to resist the urge to help those who don’t buy insurance.
    Society or government? If society wants to help those without insurance, that’s not a problem–charity can handle that. It’s the coercive interference by government that’s a problem.

  11. Anderson says:

    When did “government” become alien to “society”?

    Dunno where you live, but gov’t is PART of my society.

  12. Steve says:

    We are already subsidizing health care consumption massively as is.

    Yes, and it is driving up the cost of health care the same way financial aid has, so dramatically, driven up the cost of college the last twenty years. The irony of government financial aid is that it drives up prices and makes it harder to afford the product or service. Then people become dependant on borrowing the money for those necessities. Are you ready to start taking out mortgages for your medical care? What will be the collateral? Your body?

    The way to reduce medical costs is to get the government to stop inflating the industry with its free money.