Elderly Mental Health and Medicaid Transition

This paper analyzes the role of mental health conditions for Medicaid transitions and health care
utilization of the elderly in the U.S. Several late life events like retirement and widowhood expose
individuals to an increased risk of mental illness. However, there is currently little financial risk protection
for the elderly against mental health shocks through Medicare, resulting in an increased out-of-pocket
medical spending. In the light of limited coverage of medical costs, in particular mental health care
and nursing home care, Medicaid has increasingly become an important public health care provider.
While it was originally designed for the poor, the demographic developments and persistent increase in
medical costs have raised the fraction of middle income households qualifying for it. Moreover, Medicaid
is asset and income tested which may provide incentives to the households to spend down to a specific
threshold in order to qualify for health insurance coverage. In this study we focus on the so called non-
institutionalized “medically needy households” (French et al, 2011): these are households that do not
have enough financial resources to cover the non-institutional medical expenses but they may not qualify
for Medicaid through the usual channels due to higher incomes. While studies show that the catastrophic
expenditures of this group is related to long-term care, we will study the role that mental health problems
play towards this. To investigate these issues, we use data from the Health and Retirement Study (1992-
2014) and conduct the following analysis. We first document heterogeneities in Medicaid transition
conditional on having mental health episodes for age groups 65 and older. In a second step, we will
exploit the state-level variation in the income eligibility thresholds for the Medicaid medically needy
program to understand the effect of these discontinuities in determining out-of-pocket medical spending.
State level income thresholds provide an (conditional) exogenous shift in the probability of being covered
by Medicaid, thus affecting individual’s out-of-pocket expenditures and health care utilization. In the
final step, we would like to measure the size of the moral hazard problem by comparing health care
utilization across individuals who are subject to different medically needy income threshold limits. The
moral hazard problem arises if individuals increase out-of-pocket expenditures and health care utilization
significantly more than they would otherwise do, in order to spend down their income to the income
eligibility threshold of the Medicaid medically needy program. The results of our study have implications
for the provision of sufficient coverage of mental health care for the elderly through Medicare. Hence, our
study also contributes to an understanding of the interactions between the two most important public
insurance programs in the U.S. – Medicare and Medicaid – along this important dimension.