Medicaid, Crowd-Out, and Long-Term Care Insurance Chapter 23

2 Medicaid Federal-state joint program providing care to low-income people Federal-state joint program providing care to low-income people Categorically Needy Categorically Needy Medically Needy Medically Needy 34 states and Washington, D.C., have such programs 34 states and Washington, D.C., have such programs Special Groups Special Groups For example, qualified Medicare beneficiaries For example, qualified Medicare beneficiaries Federal government matches state Medicaid spending based upon the ratio of state to federal per capita income Federal government matches state Medicaid spending based upon the ratio of state to federal per capita income State Share = [(state income) 2 /(federal income) 2 ] x.45 State Share = [(state income) 2 /(federal income) 2 ] x.45 Federal share is between 50 and 83 percent of total Federal share is between 50 and 83 percent of total Federal government pays approximately 75 percent of Mississippi and 50 percent of Illinois Medicaid Federal government pays approximately 75 percent of Mississippi and 50 percent of Illinois Medicaid See CMS web site for details: See CMS web site for details:

3 Categorically Needy Families who meet (old) Aid to Families of Dependent Children eligibility requirements Families who meet (old) Aid to Families of Dependent Children eligibility requirements States set eligibility as percentage of federal poverty line (FPL) States set eligibility as percentage of federal poverty line (FPL) Most states at approximately 45 percent of FPL Most states at approximately 45 percent of FPL Pregnant women and children under age 6 up to 133 percent of FPL Pregnant women and children under age 6 up to 133 percent of FPL Children ages 6 to 19 with family income up to 100 percent of FPL Children ages 6 to 19 with family income up to 100 percent of FPL Supplemental Security Income (SSI) recipients in most states Supplemental Security Income (SSI) recipients in most states Individuals and couples who are living in medical institutions and who have monthly incomes up to 300 percent of the SSI income standard Individuals and couples who are living in medical institutions and who have monthly incomes up to 300 percent of the SSI income standard

4 Federal Poverty Line, 2006

5 Mandated Medicaid Services Inpatient and outpatient hospital services Inpatient and outpatient hospital services Prenatal care Prenatal care Vaccines for children Vaccines for children Physician services Physician services Nursing facility services for persons aged 21 or older Nursing facility services for persons aged 21 or older Family planning services and supplies Family planning services and supplies Rural health clinic services Rural health clinic services Home health care for persons eligible for skilled nursing services Home health care for persons eligible for skilled nursing services Laboratory and x-ray services Laboratory and x-ray services Pediatric and family nurse practitioner services Pediatric and family nurse practitioner services Nurse-midwife services Nurse-midwife services Federally qualified health center (FQHC) services Federally qualified health center (FQHC) services Early and periodic screening, diagnostic, and treatment (EPSDT) services for children under age 21 Early and periodic screening, diagnostic, and treatment (EPSDT) services for children under age 21

6 States Have Considerable Flexibility with Respect to the Extent of Covered Services Alabama Medicaid Alabama Medicaid 14 doctor visits per calendar year 14 doctor visits per calendar year 16 inpatient hospital days per calendar year 16 inpatient hospital days per calendar year 3 non-emergency outpatient hospital visits per year 3 non-emergency outpatient hospital visits per year For more on Alabama Medicaid: For more on Alabama Medicaid:

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8 Note that the dark segments are actually long term care!

9 Medicaid as a Share of National Personal Healthcare Spending, 2004 Total Personal Healthcare 17% Hospital Care 17 Professional Services 12 Nursing Home Care 44 Prescription Drugs 19 Source: data from Kaiser Family Foundation (2006a)

10 Medicaid Expansions 1988 SOBRA expansions 1988 SOBRA expansions Pregnant women to 133 percent of poverty line Pregnant women to 133 percent of poverty line Children age 0 to 5 to 133 percent of poverty line Children age 0 to 5 to 133 percent of poverty line Children age 6 to 19 to 100 percent of poverty line Children age 6 to 19 to 100 percent of poverty line Option to extend coverage to children to 185 percent of poverty line Option to extend coverage to children to 185 percent of poverty line Option to extend coverage to children to age 21 Option to extend coverage to children to age 21

11 Medicaid Expansions and the Crowd-Out of Private Coverage “Crowd-out” exists when a public program substitutes for private health insurance coverage. “Crowd-out” exists when a public program substitutes for private health insurance coverage. To what extent have the Medicaid expansions of eligibility for children (ages 7 to 19) resulted in an erosion of private coverage for children? To what extent have the Medicaid expansions of eligibility for children (ages 7 to 19) resulted in an erosion of private coverage for children?

12 Extent of Crowd-out Depends upon How the Question is Asked “What is the reduction in private insurance coverage as a share of the persons who enrolled in Medicaid directly as a result of the expansions?” “What is the reduction in private insurance coverage as a share of the persons who enrolled in Medicaid directly as a result of the expansions?” The decline in private insurance was roughly 50 percent of the increase in Medicaid coverage induced by the expansions. The decline in private insurance was roughly 50 percent of the increase in Medicaid coverage induced by the expansions. Source: Cutler and Gruber (1997)

13 Alternative Questions and Answers “What is the reduction in private insurance coverage as a share of the total increase in Medicaid coverage?” “What is the reduction in private insurance coverage as a share of the total increase in Medicaid coverage?” About 22 percent of the increase in Medicaid coverage. Many folks enrolled in Medicaid for reasons other than the expansions. About 22 percent of the increase in Medicaid coverage. Many folks enrolled in Medicaid for reasons other than the expansions. “What is the share of the decline in overall private insurance coverage over the 1987–1992 period that resulted from a substitution of Medicaid?” “What is the share of the decline in overall private insurance coverage over the 1987–1992 period that resulted from a substitution of Medicaid?” About 15 percent. Private insurance changed for a variety of reasons; Medicaid expansions is only one reason. About 15 percent. Private insurance changed for a variety of reasons; Medicaid expansions is only one reason. Source: Cutler and Gruber (1997)

14 SCHIP State Children’s Health Insurance Plan State Children’s Health Insurance Plan Created by the 1997 Balanced Budget Act Created by the 1997 Balanced Budget Act Federal matching funds for coverage of lower- income children up to 300 percent of poverty line Federal matching funds for coverage of lower- income children up to 300 percent of poverty line Three options: Three options: Expand Medicaid (19 states in 2001) Expand Medicaid (19 states in 2001) Separate program (15 states in 2001) Separate program (15 states in 2001) Combination program (17 states in 2001) Combination program (17 states in 2001)

15 SCHIP & Crowd-Out Over the 1996–2000 period: Over the 1996–2000 period: ~ 9 percent of kids meeting the income eligibility criteria gained insurance coverage through SCHIP ~ 9 percent of kids meeting the income eligibility criteria gained insurance coverage through SCHIP If anything, Medicaid expansions more effective than separate programs If anything, Medicaid expansions more effective than separate programs Result appears to come from outreach programs Result appears to come from outreach programs 46.6 percent of those who gained coverage had had private coverage—crowd-out equivalent to Medicaid 46.6 percent of those who gained coverage had had private coverage—crowd-out equivalent to Medicaid Source: LoSasso and Buchmueller (2004)

16 Dealing with Crowd-out Higher-income eligibles more likely to have crowd-out Higher-income eligibles more likely to have crowd-out because they are more likely to have ESHI because they are more likely to have ESHI Waiting periods reduce crowd-out Waiting periods reduce crowd-out A waiting period of five months essentially eliminates crowd-out, but A waiting period of five months essentially eliminates crowd-out, but Reduces the take-up rate by 3.7 percent Reduces the take-up rate by 3.7 percent Work by others suggests that premium sharing also reduces crowd-out Work by others suggests that premium sharing also reduces crowd-out Source: LoSasso and Buchmueller (2004)

17 Long-Term Care Insurance In 2002, approximately 2.2 percent of the U.S. population had long-term care insurance In 2002, approximately 2.2 percent of the U.S. population had long-term care insurance

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19 Why Not Buy LTC Insurance? Demand side factors: Demand side factors: Misinformed public Misinformed public “I’m not likely to need a nursing home” “I’m not likely to need a nursing home” “Medicare covers nursing home care” “Medicare covers nursing home care” Availability of informal care Availability of informal care “My daughter will take care of me” “My daughter will take care of me” Supply side factors: Supply side factors: Concerns about adverse selection Concerns about adverse selection Concerns about moral hazard Concerns about moral hazard Real Reason: Real Reason: Most folks already have coverage Most folks already have coverage It’s called Medicaid It’s called Medicaid

20 If One Lives Long Enough: It is more than likely one will spend time in a nursing home It is more than likely one will spend time in a nursing home And one will likely stay for many months And one will likely stay for many months Percent of Remaining Life Spent in a Nursing Home, 1988 Source: data from Liang et al. (1996)

21 Average Length of Stay for Nursing Home Residents, Aged 75 to 84, 1999 Percent of Residents Source: data from 1999 National Nursing Home Survey as cited at

22 Adverse Selection Recent work suggests that individuals know more about their likely use of nursing homes than does the insurer Recent work suggests that individuals know more about their likely use of nursing homes than does the insurer There is adverse selection There is adverse selection However, much of this is offset by risk preferences However, much of this is offset by risk preferences More “cautious” individuals are both more likely to have LTC insurance and less likely to use the care More “cautious” individuals are both more likely to have LTC insurance and less likely to use the care Source: Finkelstein and McGarry (2003)

23 Moral Hazard Very few studies, but all suggest substantial price sensitivity: Very few studies, but all suggest substantial price sensitivity: Chiswick (1976) Chiswick (1976) Nursing home demand elasticity -2.3 Nursing home demand elasticity -2.3 Scanlon (1980) Scanlon (1980) Nursing home demand elasticity -1.1 Nursing home demand elasticity -1.1 Nyman (1989) Nyman (1989) Wisconsin nursing home elasticity -1.7 Wisconsin nursing home elasticity -1.7 Suggests that insurance would increase use substantially Suggests that insurance would increase use substantially Source: data from Chapter 7 of textbook

24 Medicaid and Long-Term Care Nursing home care is the single largest component of the Medicaid budget Nursing home care is the single largest component of the Medicaid budget Medicaid provides about 45 percent of nursing home revenues Medicaid provides about 45 percent of nursing home revenues

25 Medicaid Nursing Home Coverage Essentially an LTC policy that has a large deductible— “all” your assets Essentially an LTC policy that has a large deductible— “all” your assets 1988 Medicare Catastrophic Coverage Act 1988 Medicare Catastrophic Coverage Act Largely repealed, except provisions for spousal impoverishment for Medicaid nursing home care Largely repealed, except provisions for spousal impoverishment for Medicaid nursing home care Result was to make many likely users of nursing home care eligible Result was to make many likely users of nursing home care eligible 2006 legislation extends “look back” for assets from three to five years and limits household exclusion to $500, legislation extends “look back” for assets from three to five years and limits household exclusion to $500,000

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27 Medicaid Crowd-out of LTC Source: Brown and Finkelstein “The Interaction of Public and Private Insurance: Medicaid and the Long Term Care Insurance Market.” NBER Working Paper (December).

28 Discussion Questions  Under what conditions would a Medicaid managed care program likely be successful in restraining Medicaid costs?

29 Discussion Questions  Some have proposed that more children would be enrolled in SCHIP (or Medicaid) if their parents could also be enrolled. Leaving aside the issue of the extent to which children would enjoy first-time coverage, what effect would this have on parental coverage? How large a crowd-out effect would you anticipate?

30 Discussion Questions In 2006, Congress enacted legislation that prevents persons with a home valued at more than $500,000 from qualifying for Medicaid; states can raise this limit to $750,000. (Homesteads of whatever value are exempt when a community-dwelling spouse or other dependent is living there.) In addition, Medicaid will “look back” for five years instead of three in determining whether assets have been transferred in anticipation of Medicaid eligibility. What effects do you expect this action to have on Medicaid eligibility and the demand for long-term care insurance? In 2006, Congress enacted legislation that prevents persons with a home valued at more than $500,000 from qualifying for Medicaid; states can raise this limit to $750,000. (Homesteads of whatever value are exempt when a community-dwelling spouse or other dependent is living there.) In addition, Medicaid will “look back” for five years instead of three in determining whether assets have been transferred in anticipation of Medicaid eligibility. What effects do you expect this action to have on Medicaid eligibility and the demand for long-term care insurance?

31 Discussion Questions  Suppose you are a reasonably wealthy individual. Under what circumstances would you buy long- term care insurance rather than investing in other assets?