The Opportunity Cost of Medicaid

by Oren Cass

In the new print issue, I’ve written about Our Medicaid Mess: the extraordinary misallocation of anti-poverty funds to one of our least effective government programs. Total anti-poverty spending relative to the population in poverty has nearly doubled over the past forty years, from $12,000 per person to $23,000 (2015 dollars). More than 90 percent of that increase has gone to health care – almost entirely Medicaid. Thanks to Obamacare, the spending growth and prioritization of health care will continue in the years to come. Medicaid now costs almost $600B per year, on par with our public education system and our military and responsible for the majority of all anti-poverty spending 

This overwhelming emphasis on health care would be a questionable approach to alleviating poverty even if it delivered impressive results for the health outcomes of recipients. But the larger problem is that Medicaid fails to achieve even that.

Many policy wonks are familiar with the Oregon Health Insurance Experiment, in which low-income residents of the state were randomly assigned to receive or not receive Medicaid coverage. The study’s critical conclusion: “Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years.”

This has not dimmed enthusiasm on the left for the program, though it has required every stranger contortions. As I explain in the magazine:

Asked [in April] by Vox’s Dylan Matthews about the efficacy of public health-care subsidies for low-income households, Jason Furman, chairman of the White House’s Council of Economic Advisers, offered three defenses, each less coherent than the last. First, he said, was health: “The Oregon study gave us pretty clear evidence of certain health benefits, both self-reported, how people felt about their health, and in areas like mental health.” Fair enough, though defining Medicaid’s primary value as helping people feel better about their health is faint praise.

Second, he said, “It’s a way to get more money or more resources in the hands of people [who] need it, addressing the inequality that we were talking about before, the progressivity.” This is no defense of health-care spending at all. It argues for a generous safety net, but not for emphasizing one type of benefit over another.

Third, Furman made the following, almost incomprehensible statement: “Giving someone a dollar versus giving them insurance. If they really need it, they get a lot more than a dollar and if they didn’t, maybe they don’t get anything is more valuable even if the average cost is just a dollar than giving someone a dollar.” He might mean that insurance coverage with an expected value of one dollar appears wasteful to those who don’t get sick, but that one dollar is very valuable to those who do get sick; so, overall, the insurance is worth more than one dollar.

If this is what Furman means, the claim is not correct. Presumably insurance with an expected value of a dollar is worth about the same as a dollar and, given the choice, an individual would rather receive a dollar with which to buy the insurance or anything else than automatically receive the insurance. More important, the argument begs the question. Yes, if the insurance is worth a dollar, then the insurance is as good as a dollar. But the evidence suggests instead that a dollar spent on Medicaid is worth far less to the recipient than a dollar. Under those circumstances, one cannot defend it by suggesting that maybe it is worth a dollar after all.

Still, I think conservatives make a mistake using such studies to argue Medicaid is effectively worthless, for two reasons.

First, because Medicaid is not worthless. It might produce an atrociously low return on spending, it might achieve nothing for a significant share of recipients, but there are also cases where it helps. Indeed, most people probably know someone who has at some point benefited from access to Medicaid coverage. Studies will undoubtedly emerge that identify positive effects. Which leads to…

Second, “is Medicaid worthless?” is the quintessentially liberal battleground and a ridiculous lens through which to evaluate policy. Furman’s defense, for instance, amounts to a claim that providing Medicaid is probably better than not providing Medicaid. The Oregon experiment tested the same question—Medicaid only had to defeat “no Medicaid,” and even then it largely failed. But the right question to ask is whether this is a good allocation of scarce resources—not “is Medicaid worthless?”, but “is Medicaid best?” The critical study is not the Oregon experiment, but one that gives Medicaid to Group A while offering Group B a wage subsidy, housing voucher, or used car of equal value. Good luck to Medicaid achieving superior outcomes in terms of health, upward mobility, or any other measure of well-being in that match-up.

Researchers at the Yale School of Public Health tried to approximate this approach, comparing health outcomes in states that allocate relatively more or less of their social spending to health care. Sure enough, “states with a higher ratio of social to health spending (calculated as the sum of social service spending and public health spending divided by the sum of Medicare spending and Medicaid spending) had significantly better subsequent health outcomes for the following seven measures: adult obesity; asthma; mentally unhealthy days; days with activity limitations; and mortality rates for lung cancer, acute myocardial infarction, and type 2 diabetes.”

Rather than asking which programs can be cut most, we need to ask which strategies will most help the poor. Maybe that sounds self-evident, but actually spending dollars well is too often lost in the fight over whether to spend less or spend more.

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