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Tinkering with Medicaid Eligibility Hurts Beneficiaries

July 19, 2021

When Is Tinkering with Safety Net Programs Harmful to Beneficiaries?
National Bureau of Economic Research
July 2021
By Jeffrey Clemens & Michael J. Wither


Interactions between redistributive policies can confront low-income households with complicated choices. We study one such interaction, namely the relationship between Medicaid eligibility thresholds and the minimum wage. A minimum wage increase reduces the number of hours a low-skilled individual can work while retaining Medicaid eligibility. We show that the empirical and welfare implications of this interaction can depend crucially on the relevance of labor market frictions. Absent frictions, affected workers may maintain Medicaid eligibility through small reductions in hours of work. With frictions, affected workers may lose Medicaid eligibility unless they leave their initial job. Empirically, we find that workers facing this scenario became less likely to participate in Medicaid, less likely to work, and more likely to spend time looking for new jobs, including search while employed. The observed outcomes suggest that low-skilled workers face substantial labor market frictions. Because adjustment is costly, tinkering with safety net program parameters that determine the location of program eligibility notches can be harmful to beneficiaries.

Comment by Don McCanne

Who should be deprived of health care? Likely most would agree that nobody should, and, ideally, everyone should agree.

With our dysfunctional, fragmented system of financing health care, a special funding program must exist to cover those who do not have the resources to pay for health care, thus we established Medicaid. But what threshold do we establish for eligibility? Is it all-or-none financing? Does minor tinkering invoke all-or-none decisions?

In the real-world example presented, an increase in minimum wage reduced the number of hours that a low-skilled worker could work and still maintain eligibility for Medicaid. The result was both less employment and less Medicaid. Such all-or-none decisions could be disastrous for the health care or income of an affected low-wage worker. Last year, evidence from Arkansas showed that a work requirement decreased Medicaid enrollment without increasing work.

Suppose we had a single payer Medicare for All system. Everyone would automatically have financial barriers removed from medical care. There would be no need to establish a special medical welfare program such as Medicaid. Controlling costs for the indigent would be accomplished by funding the entire system though progressive taxes. That way, everyone could have health care in a system that is affordable for each of us. The complexity and injustices of segregating patients into a Medicaid program would no longer be necessary.


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