Health Insurance and High Cost Borrowing: The Effect of Medicaid on Pawn Loans, Payday Loans, and Other Non-Bank Financial Products

We analyze whether the Affordable Care Act’s (ACA) health insurance expansions affect the financial security and economic well-being of low-income households. Specifically, we use plausibly exogenous variation in state choices to expand Medicaid to determine whether newly eligible households change their use of alternative financial service (AFS) products: pawn loans, payday loans, check cashing outlets, and other non-bank financial products. We use a synthetic control methodology to account for differential trends of potentially confounding variables correlated with the Medicaid expansion. Using four years of the FDIC-sponsored Unbanked and Underbanked Supplement to the CPS linked with the March CPS Supplement on health insurance and income, we find that Medicaid eligibility decreases utilization of any AFS provider by 1.4 percentage points (15 percent). This is driven by a decrease in the utilization of AFS credit providers, specifically pawn shops. Preliminary analysis suggests that these trends are not consistent with improved health, or increases in productivity, but instead occur alongside lower out-of-pocket medical expenditures.