Public Health Insurance and Private Savings
Jonathan Gruber Aaron Yelowitz
Abstract
We assess the effect of a means‐ and asset‐tested social insurance program, Medicaid, on the savings behavior of households. We do so using data on both asset holdings and consumption, matched to information on the eligibility of families for health insurance coverage under this program. Exogenous variation in Medicaid eligibility is provided by the dramatic expansion of this program over the 1984–93 period. We document that Medicaid eligibility has a sizable and significant negative effect on wealth holdings, and we confirm this finding by showing a strong positive association between Medicaid eligibility and consumption expenditures. We also exploit the fact that asset testing was phased out by the Medicaid program over this period to document that these Medicaid effects are much stronger in the presence of an asset test.
I. Introduction
One of the most striking regularities about savings behavior in the U.S. is the skewed nature of wealth holdings; the median asset/income ratio for households headed by a 35 to 44 year old high school dropout is one-tenth that of households headed by a 35 to 44 year old college graduate. In a provocative recent article, Hubbard, Skinner, and Zeldes (1995) (hereafter, HSZ) suggest that one explanation for this skewness is the structure of means-tested social insurance programs for lower income households in the U.S., which both mitigate the need for precautionary savings through the provision of a welfare safety net for consumption, and tax away individual savings through means-testing of assets to qualify for government assistance. While compelling in theory, however, the practical importance of social insurance programs for savings behavior at the bottom of the income distribution is not clear; there is little evidence on the response of the savings or consumption decisions of low-income households to means-tested, asset-tested social insurance programs.
This paper assesses the savings impacts of one major social insurance program, Medicaid, which provides health insurance for low income individuals. By providing first-dollar coverage of medical expenditures for qualifying individuals, Medicaid substantially lowers the expenditure risk facing both uninsured families and those privately insured families who drop plans with large copayments or deductibles to join the free Medicaid program. Moreover, along with means-testing, Medicaid has also traditionally incorporated asset tests into its eligibility determination process. If social insurance is playing the role suggested by the HSZ model, savings and consumption should respond to programs like Medicaid.
During the late 1980s and early 1990s, the Medicaid program substantially eased its eligibility criteria over this period, first by state fiat, and later by federal mandate. The expansion occurred at a differential pace across the states, and even within states through differential age cutoffs for the eligibility of children. This quasi-randomization of insurance coverage allows us to assess the effect of providing free health insurance on savings behavior while avoiding issues of selection in who chooses public insurance coverage. Moreover, throughout this period states were removing their asset tests for program qualification. This allows us to quantify the interaction between means testing and asset testing of eligibility for this program.
To carry out this test, we use data from two sources. The first is the Survey of Income and Program Participation (SIPP), the largest nationally representative survey with annual data on the asset holdings of the U.S. population. The second is the Consumer Expenditure Survey (CEX), the only U.S. database with annual data on total family consumption levels. We construct a household-specific valuation of the Medicaid expansions, and match this measure to the SIPP data on household asset holdings and the CEX data on consumption. We find a highly significant, negative relationship between the generosity of a family's public insurance entitlement and that family's asset holdings. We confirm this finding by showing that there is a strong positive effect of Medicaid entitlement on consumption spending. And, in both cases, we find that the effect of Medicaid eligibility is much stronger in the presence of an asset test. The robustness of our finding across two very different sources of data confirms that Medicaid is an important determinant of the savings decisions of eligible households.
Our paper proceeds as follows. In Part II, we provide some theoretical background, review previous evidence on social insurance and savings, and describe the Medicaid expansions that form the backbone of our empirical approach. In Part III, we discuss the data and estimation strategy. Part IV presents our SIPP results for asset accumulation, and our CEX results for consumption. Part V concludes.
II. Background
The Medicaid Expansions
Medicaid coverage of medical expenses was traditionally limited primarily to very low income single female-headed families who received cash welfare under the Aid to Families with Dependent Children (AFDC) program. Beginning in 1984, however, the program expanded eligibility for all children, and for pregnant women; that is, for women, these expansions applied to the expenses of pregnancy only. From 1984 to 1987, there were increases in Medicaid eligibility for very poor families who did not meet the eligibility criterion due to family structure (these expanded on similar state programs that existed before 1984). From 1987 onwards, there were substantial increases in the income cutoff for Medicaid eligibility, for children and pregnant women in all family structures. By 1990, states were required to cover all
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