Costs and Benefits of In-Kind Transfers: The Case of Medicaid Home Care Benefits

Many large government programs provide benefits in kind as opposed to in cash. Providing benefits in kind potentially distorts decisions and leads to a deadweight loss if recipients value the benefits less than they would a cost-equivalent cash transfer. Yet providing benefits in-kind may have some offsetting benefits, such as improving the targeting of benefits to desired beneficiaries and improving the efficiency of the tax system. We complete what is, to our knowledge, one of the first empirical studies of the costs and benefits of providing transfers in kind as opposed to in cash. We focus on the case of the US Medicaid program's provision of in-kind home health care benefits. Three state Medicaid programs completed randomized experiments that converted the usual in-kind benefits into cash benefits for a randomly-selected subset of benefit recipients. We use the results of these experiments together with a variety of other evidence to estimate the costs and benefits of providing Medicaid home care benefits in kind. We find that in the case of Medicaid home care benefits, both the costs and benefits of providing transfers in kind as opposed to in cash are large. This suggests that alternative targeting mechanisms, if available, have the potential to significantly increase efficiency relative to traditional Medicaid policy.