Medicaid and Household Spending

Medicaid provides free or cheap health insurance to families with low incomes. While large research literatures focus on the health insurance and health access effects of Medicaid, much less research has studied the effect of Medicaid on spending. As Buchmueller et al. (2015) point out in their recent review of economics research on Medicaid, “given that a fundamental purpose of health insurance is to protect individuals and families from the financial burden of large medical expenditures, there is surprisingly little research on the effect of Medicaid on financial outcomes.”

The goal of this paper is to understand how Medicaid eligibility affects household spending. I first consider the effect of Medicaid eligibility on health insurance coverage. I next estimate the effect of Medicaid eligibility on spending on health insurance coverage and medical care. Because health insurance is designed to protect families from extreme spending, I consider the effect of Medicaid eligibility on the distribution of spending in addition to the effect on average spending. Finally, I examine how Medicaid eligibility affects spending on items related to health, such as cigarettes and alcohol, and on participation in other public programs, such as food stamps.

Because having Medicaid eligibility is endogenous, I study the impact of Medicaid eligibility on spending using a simulated instrumental variables strategy, which isolates shifts in Medicaid eligibility that come from state-level changes in Medicaid eligibility rules. I draw on data from the 1998-2014 Consumer Expenditure Survey (CEX), which is a rotating panel that interviews roughly 5,000 households every three months over five calendar quarters. Since the CEX asks a wide variety of questions about household expenditures, it is well-suited to studying how Medicaid eligibility influences spending patterns.

I find that an additional family member becoming eligible for Medicaid increases the average number of people in a household covered by Medicaid by approximately 0.20. This increase in Medicaid coverage crowds out a lot of private health insurance coverage, which results in a decrease in average spending in health insurance. Despite the large amount of crowd-out, Medicaid coverage also decreases average spending on medical care. However, the estimated effect of Medicaid on health insurance spending is roughly twice the estimated effect on medical care. Medicaid decreases the likelihood of large expenditures on both health insurance and medical care. I find no evidence that Medicaid coverage changes average spending on cigarettes or alcohol and no evidence of spillovers between Medicaid and other social programs.

These results highlight the fact that Medicaid protects low income families from large expenditures on health insurance in addition to large expenditures on medical care. Despite fears that people may use money saved from public programs to support unhealthy habits or hopes that increased access to medical care may decrease bad habits, I find no evidence that spending on cigarettes or alcohol are affected by Medicaid coverage. Similarly, I find no evidence that people are more likely to participate in other public programs as a result of Medicaid expansions.