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Medicaid expansion has unintended consequences

Medicaid expansion has unintended consequences

Peter Crabb
January 29, 2015
January 29, 2015

The debate over whether or not to expand Medicaid insurance coverage, or for that matter the debate over Obamacare in entirety, is a series of one compromise over another. But despite all the efforts to find a “middle ground,” nothing is being done to address the root incentive problems in the health care services market.

The most recent compromise is the agreement Indiana reached with the U.S. Department of Health and Human Services that will require new Medicaid recipients in that state to pay at least $1, and up to 2 percent, of their monthly insurance premiums from this government program. Not much “skin-in-the-game” here, and not likely to change behavior much.

Basic economic principles show us that people respond to price incentives. When the price of some good or service rises, consumers buy less of it. At the same time, higher prices give producers an incentive to move more resources to the production of the good or service because benefits have risen. The process works in reverse when prices fall.

An expansion of the Medicaid program, even if we have an Indiana-like compromise, will mean more and more people in the Idaho health care market will make decisions over their health care with limited, or no, price information. When prices are missing or distorted they cannot perform their needed function of allocating scarce resources. Stuff gets over-used or underutilized.

Health care providers have also responded to distortions affecting their incentives. Health insurance companies and health care providers are responding to the incentive of more insured people with higher prices and more services. The Patient Protection and Affordable Care Act (PPACA) brought more people into the market with subsidized health insurance, thereby increasing the likelihood of over consumption.

In 2012, researchers from Boise State University made a presentation to the Governor Butch Otter’s Medicaid Expansion workgroup suggesting that by increasing the number of Medicaid recipients using federal funds Idaho would see an increase overall state employment, reduced costs for small businesses, increased productivity in the labor force, and cost savings in health care expenditures.

The savings are expected to come from a healthier workforce. But this “economic-impact” study ignores the higher demand and prices that result from more utilization of health care services.

More comprehensive research shows that an expansion of insurance coverage will actually decrease the labor force and labor productivity.

In his book Side Effects, University of Chicago economist Casey Mulligan shows why millions of U.S. workers now have an incentive to limit their workweek to 29 hours. Working more each week renders them ineligible for financial assistance under Obamacare, whether that is private insurance or Medicaid coverage.

Mulligan estimates that about 4 million workers face a high marginal tax rate on labor income when they work full time. Indeed, the tax rate on the additional income from working more than 29 hours per week may be more than 100 percent. Why should people want to work more if all their earnings are lost?

Additionally, many U.S. workers are ineligible for health insurance subsidies because their employers offer coverage to full-time employees. Since most employer-sponsored health plans require the employee to pay at least some portion of health insurance premiums, some workers are better off with a 29-hour work schedule, which makes them eligible for subsidies without creating penalties for employers.

Mulligan further notes that the new law disproportionately affects working, unmarried heads-of-household. This group is primarily women and already makes up a disproportionate number of those living below the poverty line, and therefore already eligible for Medicaid.

Putting it all together, Mulligan expects our new health laws will reduce real economic growth in the United States by 2 percent per year. From an Idahoan’s perspective, that could mean 10,000 fewer new jobs opening up each year and a billion dollars in lost income for the state.

The proponents of Medicaid expansion suggest that 15,000 new jobs will be created in Idaho by the infusion of federal money. Aside from the errors in the job-multiplier approach used to get this estimate, such a claim ignores the potential consequences of slower overall growth in our economy due to the dis-incentive to work full time, brought about by the expansion of Medicaid.

Dr. Peter Crabb holds a Ph.D. in economics from the University of Oregon and a master’s in business administration in finance from the University of Colorado. He is also a member of the Idaho Freedom Foundation's Board of Scholars

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