NCPA - National Center for Policy Analysis

Medicaid Deters Wealth Accumulation

August 18, 2000

Medicaid is the federal-state program that provides free health care for the poor. While many argue that it is successful in improving access to medical care, some economists say that it may hurt the poor in other, unintended ways. They argue that Medicaid encourages consumption spending -- for example, by increasing the disposable income of families who were previously paying for private coverage. It also discourages saving by reducing the need for so-called precautionary savings in anticipation of future medical expenditures.

This is harmful to such families, to the extent that savings and wealth accumulation may help a poor family move out poverty and stay there.

One study found that:

  • Medicaid increased consumption spending among the Medicaid eligible population by 4.2 percent in 1993.
  • For each $1,000 of expected Medicaid expenditures for a family, on average, consumption spending rises 0.82 percent and wealth holdings fall 2.51 percent.
  • The study's authors estimated typical Medicaid expenditures per family during their period of eligibility would be about $5,000.
  • Thus, they estimate Medicaid lowered wealth holdings an average of $1,293 to $1,645 among eligible families -- in other words, they reduced their asset holdings an average of 16.3 percent.

Source: Jonathan Gruber and Aaron Yelowitz, "Public Health Insurance and Private Savings," Journal of Political Economy, December 1999.


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