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Evidence on the Value of Medicaid

By Joshua D. Gottlieb and Mark Shepard·July 2
University of British Columbia and Harvard University

The Issue:

The largest increase in health insurance coverage from the Affordable Care Act (ACA) came from expanding Medicaid. The proposals to repeal and replace the ACA from both the House and the Senate dramatically cut the Medicaid program, with spending reduced by an estimated $772-834 billion over a decade and enrollment by 14-15 million. The Senate plan would also impose additional limits to spending growth on Medicaid over the longer-term that would further curb the program. These changes are quantitatively substantial, so it is important to make informed decisions based on the benefits and costs of Medicaid. This memo surveys research that allows us to begin quantifying this tradeoff.
Measuring and quantifying the value provided to the enrolled population is essential to guide public policy for Medicaid and health insurance more generally.

The Facts:

  • Medicaid is a federal-state program that provides free health insurance to 74 million low-income and disabled people. Prior to the ACA, most state Medicaid programs covered low-income pregnant women, kids, and some parents but did not cover childless adults. The ACA expanded eligibility to include all individuals below 138 percent of the Federal Poverty Level, though only 31 states and the District of Columbia have chosen to adopt this expanded coverage.
  • One important role for Medicaid is to provide risk protection, shielding enrollees from the financial impact of particularly adverse health events, which is the most fundamental role of an insurance product. Researchers seem to agree that access to Medicaid does improve financial security. The best source of evidence for this comes from the Oregon Health Insurance Experiment, which randomly assigned access to Medicaid among a large group of low-income uninsured people. In this instance, uninsured low-income adults were offered the opportunity to apply for Medicaid through a lottery in Oregon in 2008. Researchers compared financial outcomes between those who were able to apply for Medicaid and otherwise similar adults who did not gain access to Medicaid through the lottery. The experiment’s most striking result was that beneficiaries were financially better off: they had fewer out-of-pocket medical expenses, were less likely to owe medical debt, or to refuse treatment due to costs.
  • Does having access to Medicaid improve enrollees’ health? If having insurance makes it easier for enrollees to use medical services this could lead to better health. The best existing evidence says it improves health, but establishing this with precision is difficult as program characteristics and time periods studied vary from one study to another. And, the effects of insurance coverage might be different for different types of health problems. The evidence is mixed on whether having Medicaid improves beneficiaries’ health. The Oregon Experiment did not find statistically significant evidence of improvements in physical health measures, such as blood pressure and blood sugar after two years of coverage. But it did find large improvements in mental health and self-reported health. Other studies examining the introduction of Medicaid or its expansion over time have found that Medicaid reduces mortality (of infants during the expansion of Medicaid eligibility for low-income children between 1984-1992; of adults during the expansion of Medicaid coverage for childless adults in Arizona, Maine and New York between 2000-2005; of teenagers who benefited from expansions of Medicaid to children during the early 1980s; and of infants and children in the 1960s and 1970s following the introduction of Medicaid) and improves health later in life (for instance among teenagers who benefited from the expansion of coverage as children). But these studies lack the gold-standard randomized design of the Oregon Experiment so should be interpreted with greater caution. Without randomization (such as a lottery), it is more difficult to rule out other factors that could contribute to the mortality and health results observed.
  • Medicaid also involves substantial costs in the form of government expenditures to fund health care that is essentially free to beneficiaries. The Medicaid program cost about $532 billion in 2015 to cover 74 million people, or almost one in four Americans. The average full-benefit enrollee cost about $6,400 per year to cover in 2014. According to Congressional Budget Office, a simple repeal of the ACA would reduce federal Medicaid expenditures by $71 billion in 2018. The Senate proposal would cut them by $12 billion next year, with savings rising to $158 billion by 2026.
  • Economists also calculate the additional costs that introducing insurance produces — which provide less clear benefits to society. These additional costs come from two sources: the additional health care resources that beneficiaries use because they have coverage, plus the program’s administrative costs. The Oregon Experiment found that gaining Medicaid uniformly increased health care use: including hospitalizations (by 30 percent), emergency room use (by 40 percent), physician office visits (by 50 percent), and prescription drugs (by 15 percent). This evidence stands in contrast to the conventional wisdom that providing health insurance could reduce costs by eliminating ER visits. Of course, understanding whether this additional care is worth it requires a comparison of these real costs to the benefits provided.
  • Researchers and policy makers are not necessarily well positioned to decide how to trade off these substantial costs and benefits. One way to answer this question – which is rooted in economic theory – is to examine how much beneficiaries themselves value Medicaid based on how much they would be willing to pay for the benefits it provides. Recent evidence indicates that beneficiaries value Medicaid at less than its full cost. One source of evidence comes from Massachusetts’ low-income health insurance exchange, where researchers could observe how much charging higher premiums for Medicaid-like coverage led enrollees to drop out: at least 70 percent of enrollees valued insurance at less than their own cost of coverage. A second source of evidence used economic models to quantify how much beneficiaries valued the benefits of Medicaid in the Oregon Experiment. In this case, the researchers found that beneficiaries valued Medicaid at about one-fifth of its cost.
  • For a program that consumes so much money, and generates heated political debate, why might the beneficiaries put such a low value on their own benefits? The literature suggests two explanations. First, Medicaid provides less complete choice of doctors and hospitals than other insurance, partly because of its low reimbursement rates (see this article for instance). Second, many of the benefits of Medicaid go to medical providers who would otherwise provide uncompensated or unpaid care to the same people. In the absence of insurance coverage, hospitals still provide emergency care and lots of providers get stuck with unpaid debt, which ultimately amounts to free care. The ability to declare bankruptcy can serve as an implicit form of high-deductible insurance. Since third parties absorb some of the costs of medical care for the uninsured, people without insurance face diminished economic risk from adverse health shocks. A recent study finds that the cost of uncompensated care roughly accounts for the shortfall of enrollee value for Medicaid below program costs.

What this Means:

Medicaid is central and controversial in U.S. health insurance policy. As Congress struggles with the appropriate scale and structure of the program, it is essential to have an informed view about the value Medicaid provides rather than ideological preconceptions. Although public debate about health care reform centers on health insurance coverage, the goal of public policy is not simply to slap the label “insured” on a larger population. The purpose of health insurance is to provide value to the insured population. Measuring and quantifying this value is essential to guide public policy for Medicaid and health insurance more generally. Recent evidence suggests that Medicaid’s effects are largely consistent with the predictions of economic theory: insurance provides risk protection. But the costs are high, health benefits are less clear, and benefits are largely captured by providers rather than patients.

Topics:

Health Care Reform / Medicaid / Social Safety Net
Written by The EconoFact Network. To contact with any questions or comments, please email contact@econofact.org.

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