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Economics of means-tested transfer programs in the United States
By Robert Moffitt The University of Chicago Press
Copyright © 2016 National Bureau of Economic Research
All rights reserved.
ISBN: 978-0-226-39252-3
CHAPTER 1
The Medicaid Program
Thomas Buchmueller, John C. Ham, and Lara D. Shore-Sheppard
1.1 Introduction
In both its costs and the number of its enrollees, Medicaid is the largest means-tested transfer program in the United States. It is also a fundamental part of the health care system, providing health insurance to low-income families, indigent seniors, and disabled adults. In 2011, Medicaid covered over 68 million individuals at a cost to state and federal governments of nearly $400 billion (Centers for Medicare and Medicaid Services [CMS] 2013a). Federal Medicaid expenditures, which historically have averaged between 50 and 60 percent of total program expenditures, represent about 8 percent of the federal budget and nearly 2 percent of gross domestic product (Congressional Budget Office 2014). In 2012, the median state spent 22.4 percent of its budget on Medicaid (National Association of State Budget Officers 2013).
Because it finances different types of services for different groups of beneficiaries, it is often noted that Medicaid is essentially four public insurance programs in one (Gruber 2003). First, Medicaid is the primary source of health insurance for low-income children and parents, providing coverage for a full range of outpatient and inpatient services. Second, Medicaid provides complementary insurance for low-income seniors for whom Medicare is the primary source of insurance. Third, Medicaid covers the medical expenses of low-income disabled individuals. Fourth, Medicaid is the largest source of financing for nursing home care. In addition to differences related to the characteristics and needs of different beneficiary groups, there is considerable heterogeneity across states. Although the federal government establishes important standards, states have considerable flexibility in terms of eligibility rules, the method and level of provider payment and, to a lesser extent, program benefits. Thus, it is also often argued that Medicaid is not one program, but fifty-one.
Expanded eligibility for Medicaid is a critical component of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 — together known as the Affordable Care Act (ACA). Initial projections were that roughly half of all individuals who gain insurance coverage as a result of the ACA would be enrolled in Medicaid. By establishing a new federal income standard, it was expected that the ACA would significantly reduce the variation across states in eligibility rules. However, because of the 2012 Supreme Court ruling that essentially made the ACA Medicaid expansions voluntary to states, implementation of the ACA has reduced variation in eligibility rules among expansion states while accentuating differences between states that have and have not elected to expand their programs. A number of expansion states have received waivers from the federal government allowing them to innovate on a number of dimensions. Thus, the ACA has continued not only the growth of Medicaid in terms of enrollment and expenditures, but it has contributed to the increased complexity of the program.
The ACA represents a significant inflection point for the Medicaid program, with important implications for the US health care system and for economic research on the program. The ACA eligibility expansions not only increase Medicaid enrollment and spending, but they also accelerate changes in the characteristics of individuals served by the program. As we describe below, at its inception, Medicaid eligibility was closely linked to the receipt of cash welfare benefits. Over time, this link was loosened and Medicaid eligibility limits were increased substantially for children, and to a lesser extent their parents. These expansions led to voluminous research literatures on the impact of Medicaid on a broad range of outcomes. The literature on how Medicaid affects access to care and health outcomes, especially for children, is particularly large. Multiple studies that we review in this chapter (and many more that we are not able to include) provide strong evidence that Medicaid significantly improves access to care. Several studies also suggest that this increased care leads to better health outcomes, including a reduction in infant and child mortality. The ACA eligibility expansions will largely affect nondisabled, nonelderly childless adults, a demographic group that has been underrepresented in the program. Although there has been less research on the impact of Medicaid on this population, several important studies have been published recently. The most notable are based on the randomized assignment of Medicaid eligibility in Oregon. Research based on the Oregon experiment confirms a number of results from the prior literature, such as a strong effect of Medicaid on health care utilization, while also providing evidence on other outcomes, such as financial well-being, that had previously received limited attention.
This chapter reviews the history and structure of the Medicaid program and the large body of economic research that it has spawned in the nearly half century since it was established. Section 1.2 summarizes the program's history, goals, and current rules and section 1.3 presents program statistics, mainly related to enrollment and expenditures. Then we turn to the research on the impact of Medicaid. Insection 1.4 we discuss theoretical and methodological issues important for understanding these effects. Section 1.5 reviews the empirical literature, describing what has been learned thus far, investigating areas where studies seem to reach different conclusions and pointing to areas where we believe additional research would be fruitful. Section 1.6 concludes.
1.2 Program History, Goals, and Current Rules
Founded in 1965 as Title XIX of the Social Security Amendments, Medicaid is a joint state-federal program. The federal government provides the majority of the program's funding and establishes general guidelines for eligibility, services to be covered, and reimbursement rates; states provide additional funding and have some flexibility in how they administer the program in terms of eligibility levels and procedures, benefits, provider payments, and care delivery approaches. Over its fifty-year history, the program has undergone many changes and modifications, although there are characteristics of Medicaid that were present at its inception and remain important in the program today. One of these is the existence of both mandatory actions that states must take — groups of individuals that states must cover and services that states must provide — and optional actions that states may take. As a result, the program differs substantially across states with respect to eligibility, covered services, and provider reimbursement rates.
While some fundamental features of Medicaid have remained constant throughout its history, there is one key element of Medicaid that has changed in recent years. From its inception, Medicaid was available only for individuals who were actual or potential recipients of cash assistance, resulting in a means-tested program that was unavailable to large portions of the poor population. In particular, only the elderly, the disabled, or members of families with dependent children where one parent is absent, incapacitated, or unemployed (the latter only in some states) could be eligible for Medicaid. The requirement for membership in one of these groups began to be relaxed beginning with the Deficit Reduction Act of 1984, but not until the ACA was implemented was eligibility for Medicaid extended more broadly to low-income adults who were not elderly, disabled, or parents of a dependent child. The ACA thus represents both a continuation of the program as it has existed and a fundamental shift.
The history of the program can be divided into three main periods. First is the period between 1965 and the early 1980s, when the program was characterized by strict limits on eligibility that were not solely income based. Since many of the features of the program established at its enactment survive in some form today, in discussing this period we also lay out the basic structure of eligibility for the program, services covered, and the structure of reimbursement. Second is the period between the early 1980s and prior to the passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), when definitions of eligibility began to expand, although the primary route to Medicaid eligibility remained eligibility for cash assistance. In our discussion of this period we focus primarily on the incremental changes that were occurring with eligibility. Finally, there is the period beginning with the passage of PRWORA and culminating with the implementation of the ACA. During this time there were major changes in the program that resulted in the rules in place today.
We summarize the major legislative actions affecting Medicaid in table 1.1. From these legislative actions it can be seen that Medicaid is a program of fundamental tensions: between a recognition that many poor individuals lack health insurance, resulting in a desire for expanded eligibility, and concern about substantial and growing costs of the program; between a desire to compensate providers at sufficiently high levels to ensure participation and a desire to contain costs by capping provider compensation; and between giving states flexibility to design their own programs and ensuring uniform standards across the country. In addition to legislative action, Medicaid has been shaped in important ways by federal regulatory decisions and state choices. Below we discuss these important policy elements as well.
1.2.1 Implementation and Adaptation: 1965–1983
The establishment of Medicaid in 1965 grew out of earlier medical care vendor-payment programs that were linked to cash assistance receipt. These earlier programs, established by the Social Security Amendments of 1950 and expanded by the Kerr-Mills Act of 1960, had the fundamental feature continued in Medicaid of providing federal funding at state option for vendor payments for the benefit of cash assistance beneficiaries. Historical accounts of the origin of Medicaid indicate that it passed Congress with very little discussion, being viewed as largely an improvement on the existing Kerr-Mills program (Moore and Smith 2005).
The combination of building on an existing program that was tightly linked to cash assistance receipt and responding to widespread concern about impoverishment through rising health care costs led to the creation of two classes of beneficiaries. The first group was the categorically needy: recipients of certain cash assistance programs, including Aid to the Blind, Aid to Families with Dependent Children (AFDC), and Aid to the Permanently and Totally Disabled. These programs were not only strictly means tested, but they also applied only to the blind, the elderly, the disabled, and members of families with a single parent. The second class of beneficiaries was the medically needy: individuals who would be categorically eligible except that their income and resources were above the eligibility cutoff, but who had sufficient medical expenses to bring their income after medical expenses below the cutoff (known as "spend down"). The goals of the program at its creation were thus to provide access to medical care to those viewed as the neediest members of society and to prevent medical expense-induced indigence among single-parent families, the disabled, and the elderly (Moore and Smith 2005; Weikel and LeaMond 1976).
As with the Kerr-Mills program that preceded it, participation in Medicaid was made optional for states, although if a state elected to participate it had to include all of the public assistance categories and all recipients within those categories, and if a state chose to have a medically needy program it had to open that program to members of all eligibility categories. Although state participation was optional, Congress included in the legislation incentives for states to participate. Federal funds for earlier medical assistance programs were scheduled to end within five years, funds were offered not only to match state expenditures but also to help pay for the administration of the Medicaid program, and states participating in the Medicaid program could use its more favorable matching rate for their other categorical assistance programs (Moore and Smith 2005). The federal match rate, or federal matching assistance percentage (FMAP), is determined annually for each state s based on a formula that compares a state's average per capita income level (YS) with the national average income level (YN): FMAP = 1-0.45 (YS/YN)2. According to this formula, a state where per capita income equals the national average pays 45 percent of program expenditures. No state is required to pay more than 50 percent; in most years since the start of the program between ten and fourteen higher-income states have had an FMAP of 50 percent. A state's FMAP is capped by law at 83 percent.
Over half of the states began participating in the first year of the program (see the rows of table 1.2 that show which states began participating in each year), with another eleven states beginning to participate in 1967. By 1970 all but two states (Alaska and Arizona) were participating. Generosity of the FMAP was not the only factor determining when states began participating, as some states with high match rates (including Alabama, Arkansas, and Mississippi) began participating much later than other states. For comparison, the table also shows which states have decided (as of spring 2015) to participate in the Medicaid expansion offered by the ACA; there is some correlation between deciding not to participate in the ACA at its inception and late participation in the Medicaid program. The ACA participation decision and what it entails are discussed further in the section on the most recent time period, below.
Eligibility for Families
In the initial period of Medicaid, eligibility for poor children and their families required eligibility for AFDC. To qualify for AFDC a family was required to pass stringent income and resource tests, which were far below the poverty level in most states, and generally the family must have been either headed by a single parent or have an unemployed primary earner (in states with the optional AFDC-Unemployed Parent program). An exception to the family structure requirements was created shortly after the establishment of Medicaid by the Social Security Amendments of 1967, which allowed states to extend Medicaid coverage to "Ribicoff children." Named after the senator who sponsored the legislation, these were children who did not meet the family-structure requirements for AFDC, but who nevertheless met the income and resource requirements. The income tests required that family income less disregards for work expenses and child care be below the state-determined need standard, an amount that differed depending on family size. Beginning in the early 1980s, additional income tests were added so that income less disregards less a small amount of earnings needed to be below the state's payment standard (also a function of family size) and gross income needed to be below a multiple of the state's need standard. Finally, the resource test required family resources to be below $1,000, not including the value of the home.
For illustration, calculations of the income-eligibility limits as a percentage of the poverty line for a family with three members for 1987 are shown in column (1) of table 1.3. The limits in column (1) illustrate two points: there was considerable variation in eligibility limits across states, and the income limits were well below the poverty line. Even the most generous states required family incomes to be below 85 percent of the poverty line, while the least generous states only covered families with incomes below one-third of the poverty line. (The other columns of table 1.3, which show eligibility limits for children in later years, are discussed below.)
Eligibility for Disabled Individuals
Eligibility limits for the disabled population were also fairly stringent, although somewhat less stringent than for families. From 1966 to 1972, disabled individuals needed to qualify for the Aid to the Permanently and Totally Disabled or Aid to the Blind programs to receive Medicaid, but in the Social Security Amendments of 1972, Congress replaced the non-AFDC cash assistance programs with Supplemental Security Income for the Aged, Blind, and Disabled (SSI). Under the SSI program, the federal government funds payments and sets eligibility standards. Income eligibility for SSI is determined by comparing an individual's countable income (monthly income less disregards of $20 of any income and $65 plus one-half of the amount over $65 of earned income) to the federal benefit rate (FBR). The FBR, which was set in 1972 and has been increased by the amount of inflation since then, is roughly 74 percent of the federal poverty level (FPL). States have the option of including a state supplement, and a little less than half of the states do, which increases the income-eligibility limits in those states.
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Excerpted from Economics of means-tested transfer programs in the United States by Robert Moffitt. Copyright © 2016 National Bureau of Economic Research. Excerpted by permission of The University of Chicago Press.
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