On the value of Medicaid in providing access to long‐term care

• Author: Markus Fels
• DOI: http://doi.org/10.1111/jpet.12380
• Date: 01 August 2020
• Published date: 01 August 2020

J Public Econ Theory. 2020;22:933–948. wileyonlinelibrary.com/journal/jpet © 2019 Wiley Periodicals, Inc.

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933

Received: 2 July 2018

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Accepted: 10 May 2019

DOI: 10.1111/jpet.12380

ORIGINAL ARTICLE

On the value of Medicaid in providing access to

long‐term care

Markus Fels

Department of Economics, University of

Dortmund (TU), Dortmund, Germany

Correspondence

Markus Fels, University of Dortmund

(TU), Department of Economics,

Vogelpothsweg 87, 44227 Dortmund,

Germany.

Email: markus.fels@udo.edu

Abstract

The crowding‐out by Medicaid has been identified as a

possible reason for the low demand for private long‐

term care (LTC) insurance in the USA. I extend the

previous analysis to the case in which budget constraints

inhibit access to care. This reduces the role of the

implicit tax and fundamentally changes the nature,

scope, and welfare implications of crowding‐out. It

suggests a large value of Medicaid that a private

insurance market is unable to offer due to a dilemma

prevalent in—but not exclusive to—the market for LTC

insurance: a dilemma between access and affordability.

1

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INTRODUCTION

The state and development of the US market for long‐term care (LTC) insurance has caused

worry among both researchers and policy‐makers. Despite the facts that the cost of LTC is

substantial, and that the risk of being in need of LTC is nonnegligible, the take‐up of LTC

insurance is consistently low. Private insurance is responsible for as little as 4–6% of funding of

LTC. The main contributor is the public program of Medicaid that provides funding for the very

poor (Congressional Budget Office, 2004, 2013; Frank, 2012).

Several possible reasons for the low take‐up of insurance, now termed the LTC insurance

puzzle, have been proposed and analyzed (Brown & Finkelstein, 2007, 2011; Cremer, Pestieau,

& Ponthière, 2013; Pestieau & Ponthière, 2010). A prime suspect has been found in the public

program of Medicaid crowding‐out demand for private insurance (Brown & Finkelstein, 2008;

Brown, Coe, & Finkelstein, 2006; Pauly, 1989, 1990). In that line of argument, private insurance

simply duplicates Medicaid benefits thereby increasing the shadow price of insurance. The

effect, labeled as the implicit tax of Medicaid, is argued to be particularly strong for low‐income

groups, yet still relevant for those further up the income distribution. Brown and Finkelstein

A working paper version circulates under the title “When the affordable has no value, and the valuable is unaffordable:

The U.S. market for long‐term care insurance and the role of Medicaid.”

(2008, 2011) argue that this crowding‐out is welfare‐decreasing as the public program itself

offers only very limited insurance value. In that way, Medicaid crowds out demand for a private

market that could offer a superior insurance value.

In this paper, I extend the analysis of Medicaid crowd‐out. The analysis so far assumes away the

risk of not being able to pay for LTC once in need. Yet, it is exactly this possibility that justifies the

existence of Medicaid. When the budget, that is available at the time when LTC is needed, is

uncertain ex ante, even a risk‐neutral individual sees a value both in Medicaid and in private

insurance as these enable access to care in those cases in which it is unaffordable out of one’sown

resources.

1

However, as Medicaid ensures access to basic care, it denies private insurance to offer

such an access value. This changes the nature of crowding‐out as it identifies the elimination of an

access value instead of the implicit tax as its most important component. The extent and importance

of the implicit tax in crowding‐out is further reduced as most insurance plans require an insuree to

pay a sizable deductible before paying any benefits. The reception of insurance benefits is then

limited to the state in which the deductible is affordable. In the case that the deductible is not

affordable there simply do not exist insurance benefits that could duplicate Medicaid benefits.

Hence, there is no implicit tax. This issue is of particular relevance for the poor who have previously

been identified to face the maximal implicit tax. In strong contrast, I show that the implicit tax is

nonexistent for poor because they are unlikely to receive any insurance benefits as this requires a

deductible payment that is beyond their means. In addition, financial constraints may inhibit a

person to express his willingness to pay for an insurance plan, in which case actual demand reflects

ability to pay rather than willingness to pay. In this case, Medicaid’s impact on demand is reflected

in the explicit tax burden imposed by Medicaid, not by the implicit tax. Since the poor are most

restricted in their financial means, their demand response thus reflects their explicit tax burden

from Medicaid that, in a progressive taxation scheme, is low. Consequently, the analysis reveals that

the implicit tax is relevant for different people than previously identified.

2

This refutes the argument

that variations in the implicit tax can explain the observed variations of insurance ownership.

In addition to furthering the analysis of crowding‐out by Medicaid, I seek to point out

alternative welfare implications. Concentrating on the value of insurance for consumption‐

smoothing, Brown and Finkelstein (2008, 2011) argue that Medicaid offers little value in this

regard and conclude that the crowding‐out is decreasing welfare. To add to this analysis, I

conduct a welfare comparison based on the access value between public insurance via Medicaid

and private insurance via a competitive market. I show that, even under highly favorable

market conditions, private insurance markets are unable to provide the access value that a

government assistance program, such as Medicaid, can provide. This is due to a dilemma

unique to private insurance. To ensure access even for the very poor, an insurance policy cannot

prescribe a significant deductible. However, a sizable deductible is needed to make an insurance

policy affordable for most people, in particular the poor. In this way, private insurance can only

offer plans that are either not valuable or not affordable for people with low income. Public

insurance faces no such dilemma as it allows for the possibility of redistribution. The welfare

conclusions with regard to Medicaid’s impact are thus fundamentally opposed depending on

what is considered to be the primary purpose of Medicaid: offering consumption‐smoothing

opportunities or ensuring access.

1

Compare Nyman (1999) proposing an access motive in buying health insurance. See also Nyman (2003, p. 67 ff.).

2

While Nyman (2003, p. 122 ff.) already argues that replacing the access value of insurance is the major source of

crowding‐out, he fails to recognize the detrimental effect of deductibles on insurance demand. The neglect of this effect

overstates the importance of demand crowding‐out for the poor.

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