Only 20 – 40 Cents of Each Medicaid Dollar Benefits Recipients

(A version of this column was published by Inside Sources on July 29, 2015, and syndicated to other media.)

Medicaid is the largest means-tested welfare program in the United States. Jointly funded by state and federal governments, its spending grows relentlessly whether the economy is adding or shedding jobs. Its ostensible purpose is to ensure access to medical care for households without enough income to pay for it. Yet new research suggests that only 20-40 cents of each Medicaid dollar improves recipients’ welfare. On the other hand, 90 cents of every dollar spent on the Earned Income Tax Credit (EITC) does so.

New research indicates why this gross disparity exists. In 2008 Oregon expanded Medicaid by lottery.  The state randomly selected 30,000 of 75,000 on the Medicaid waiting list. This unique procedure approximated a randomized clinical trial, the standard in pharmaceutical research. This cannot usually take place for something like Medicaid expansion because government does not randomly determine who is enrolled.

Recognizing a unique research opportunity, a team of health-policy scholars formed the Oregon Health Study Group. Two years later it compared a number of outcomes for those who “won” the Medicaid lottery to those who did not. The group concluded that Medicaid increased the recipients’ use of health resources across the board and reduced the risk of large out-of-pocket medical expenditures. However, while it reduced depression, Medicaid enrollment did not improve mortality or any physical health measure.

The team has just published new answers to an even tougher question: How much does Medicaid increase recipients’ actual welfare? In other words: Does a $100 of Medicaid spending increase the dependent’s well-being by $100? More? Less? When we buy something, we make pretty darned sure it is worth at least what we paid for it.

Using a number of sophisticated economic techniques, the study group estimated how much Medicaid recipients themselves valued the program. According to the model showing the highest value, the average recipient would give up Medicaid for $1,576. Further, only $465 of the benefit of Medicaid is health care, while $1,111 of the benefit derives from freeing up resources for other consumption. That recipients’ behavior indicates they only valued their benefits at one-fifth to two-fifths of the money spent is a serious indictment of the program.

Observing that government spending per Medicaid recipient was $3,596, the study group estimated that the program reduced Medicaid recipients’ out-of-pocket spending by $489 and increased medical spending by $885, for a net cost to taxpayers of $1,374 per recipient. The difference, $2,222, represents the amount of government spending that was simply transferred to providers.  Both $3,596 and $2,222 are significantly greater than the value of Medicaid as perceived by recipients ($1,576).

Yet Medicaid spending keeps growing, and is much larger than other welfare programs. I believe the root cause of the problem lies in a fundamental difference between Medicaid and these other programs. Citing data from 2011, the study group notes that Medicaid is the largest means-tested welfare program in the country, amounting to $425 billion versus $80 billion for food stamps, $50 billion each for the Earned Income Tax Credit (EITC) and Supplemental Security Income (SSI), and $33 billion for cash welfare (Temporary Assistance to Needy Families, TANF). Only in Medicaid do taxpayers’ dollars go directly to providers, rather than recipients as cash transfers or vouchers.

Medicaid spending is driven by providers, especially hospitals, which have relentless lobbying operations. This does not happen for other welfare programs. The National Grocers Association does not lobby to expand food stamps.

On the other hand, grocery stores are not run by religiously affiliated, nonprofit societies, as are most hospitals. The study group found that 60 percent of Medicaid spending comprises transfers to such providers for care they already give, rather than new care. These hospitals pledge to take care of indigent patients, but then lobby state and federal governments to underwrite those costs. While this plugs a hole in hospitals’ income statements, it is still uncompensated charity care from society’s perspective. It has merely been shifted from local communities to taxpayers nationwide. There is no reason to assume this is socially beneficial.

Medicaid spending could be significantly reduced, with no harm to recipients’ health, if the spending were converted to vouchers or something similar, instead of being paid to providers directly.

Comments (10)

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  1. Devon Herrick says:

    The proof that many people value Medicaid less than its cost is the number of uninsured people who were Medicaid-eligible but not enrolled. The individual mandate has changed this somewhat. But back where there were 46 million uninsured, perhaps 10 million to 12 million were eligible based on income but not enrolled in Medicaid.

    • Erik says:

      I believe the underenrollment is due to the stigma associated with the program as being “Welfare” and many Americans are conditioned to believe welfare is for poor blacks and hispanics.

  2. Bob Hertz says:

    I just submitted a longer comment, but where did it go?

  3. Bob Hertz says:

    Here is what I was going to say:

    1. The underenrollment was due in part to 20 page forms being required, especially from persons who (being poor) are almost certain to have trouble with forms.

    ACA navigators were able to offer friendly advice, and enroll people on line in 30 minutes. My insurance agency hosted some navigators and I saw this happen.

    2. Vouchers are fine for primary care, but I do not see how they could work for hospital care. How can you give someone a voucher for $15,000?

    3. John’s post seemed to register some annoyance that hospital bad debts are being absorbed by Medicaid.

    In the 1980. Congress passed the EMTALA Act that required hospitals to stabilize anyone, regardless of payment.

    But the gutless Congress did not authorize one nickel of funds to pay hospitals. It may have assumed that hospitals would just recover from privately insured patients.

    I for one would have no problem with an on-budget appropriation of funds for emergency care. God knows we funnel huge amounts of money to police departments nationwide for other emergencies.

    • Well, I think EMTALA is unconstitutional and immoral, because it attempts to legislate charity.

      • Erik says:

        John,
        If a person was mugged and had life threatening injuries and was brought to an ER Facility/Hospital unconscious and you could not determine his ability to pay you would let him die?

        Is that what you are implying?

        • It would not be within my power because I am not a doctor or nurse and do not work in an ER!

          If you are asking whether I would voluntarily accept the financial burden, I would look back to when these hospitals were founded by civic leaders, usually of the same faith confession.

          For example, when the Sisters of Charity opened a hospital, they linked up with the Catholic businessmen and raised money from the community. We have strayed far from that principle by federalizing the burden.

  4. Bart I. says:

    I don’t see how vouchers per se would be practicable, but wouldn’t this be equivalent to allowing Medicaid recipients to pay (and providers to charge) the difference between Medicare rate and the provider’s fee?

    I can see a few problems with this, although they may be manageable somehow. Primarily, providers might be tempted to boost the co-payment to whatever they think patients can pay even after receiving Medicaid. This wouldn’t be so bad if providers had a way to gauge each patient’s financial condition and set a fair maximum. More likely they would simply raise the total charge to a revenue-maximizing level, similar to the way colleges use financial aid to inflate tuition levels.