Medicaid Health Insurance Lowers Private Saving

... in 1993 the Medicaid program lowered the wealth holdings of eligible households by 17.7 percent while raising consumption expenditures by 5.2 percent.

Policymakers and economists alike worry that Americans aren't saving enough, especially lower income households. In Public Health Insurance and Private Savings (NBER Working Paper No. 6041), Jonathan Gruber and Aaron Yelowitz look at the effect of Medicaid, the government's health insurance program for low income women and children, on saving. They find that Medicaid is "an important determinant of the savings decisions of eligible households" that leads to less saving.

Medicaid offers participants first-dollar coverage for their medical expenditures, substantially reducing a major financial risk facing many families. The authors test whether the dramatic expansion in the Medicaid program from the late 1980s to the early 1990s affected the savings and consumption of low income households.

Since asset testing for Medicaid qualification was phased out during the 1984 to 1994 period, the authors also are able to investigate the importance of such requirements on savings decisions. For example, individuals might have less incentive to salt away money for bad times if they know they will have to pass an asset test before qualifying for Medicaid or other government safety net programs.

All of their results point to the same strong conclusion: Medicaid lowers savings and raises consumption. Gruber and Yelowitz estimate that in 1993 the Medicaid program lowered the wealth holdings of eligible households by 17.7 percent while raising consumption expenditures by 5.2 percent. They also learn that an asset test more than doubled the wealth decline attributable to Medicaid eligibility.

Clearly, Medicaid has an impact on lower income households. Still, the authors point out that Medicaid's impact on aggregate savings is actually quite small. For instance, the 17.7 percent drop in net worth among eligibles in 1993 translates into a mere 1.2 percent reduction in aggregate net worth.