Why Do We Care How Much We Spend on Medicaid?

By John C. Goodman.

"In evaluating the success of Obamacare in general and Medicaid expansion in particular, reporters and commentators have tended to focus on only one measure: the increase in the number of people with health insurance. At the same time, in evaluating the health consequences of the House Republican reconciliation measure, almost all the focus has been on the number of people who will lose health insurance.

The implicit premise in all of this is: more health insurance means more health care and less health insurance means less health care. That has been the premise behind virtually every important piece of health care legislation going all the way back to the creation of Medicare and Medicaid in 1965.

Yet the premise ignores a fundamental economic principle: no matter what happens to the demand for care, there won’t be a change in health care delivered unless there is a change in supply.

Under Obamacare, we are certainly spending more money. The annual cost of Medicaid expansion is $130 billion and the cost of exchange subsidies is more than $60 billion. What are we getting in return for all this extra spending?

Although there has been a substantial increase in the number of people with health insurance, one study finds that there has been no overall increase in health care. In fact, the nation may be getting less care.

In 2023, 13 years after the passage of the Affordable Care Act (Obamacare), the number of hospital admissions per capita was 19 percent lower and the number of hospital days was18 percent lower than the year the act was passed. In the 9 years following the passage of Obamacare, doctor visits per capita declined by 18%.

Further, our health care resources appear to be quite skimpy in comparison to other developed countries. Today, the United States has 2.7 doctors per 1,000 people, while the European average is 4.1. The U.S. has fewer than three hospital beds per 1,000 residents. The EU has more than five.

And our country doesn’t seem to be getting any healthier. Life expectancy in 2024 was lower than it was ten years earlier.

As for Medicaid, numerous studies through the years have produced conflicting results on what difference the program makes for enrollee health. Yet these studies suffer from all the problems that are inherent in making inferences from population statistics.

One study was different. The Oregon Health Insurance Experiment was a randomized controlled trial (RCT) that examined the medical condition of real people. Medicaid enrollees were selected by lottery and after two years the investigators compared the medical condition of those who enrolled with those who didn’t.

The results: enrollees had less financial stress and were less likely to be depressed, but there was no difference in their physical health.

One of the Oregon investigators, MIT economist Amy Finkelstein, helps us understand those results. People without health insurance, she notes, still get about 80 percent of the health care that Medicaid enrollees get. And when they are confronted with high medical bills, they actually pay only a small portion of them.

You might suppose that Medicaid enrollees are less likely to rely on hospital emergency rooms. The reverse is true. Once they enroll, Medicaid patients increase their trips to the emergency room by 40 percent.

This may explain why Medicaid enrollees place a very low value on enrollment. If you were to offer to buy their Medicaid insurance coverage, it appears that the average enrollee would sell her insurance for as little as 20 cents on the dollar. Moreover, among the lottery winners who were offered enrollment in Oregon, more than half turned the offer down! By implication, these folks placed no value on the opportunity to enroll.

These findings have convinced Finkelstein (certainly no right-winger) that rather than giving low-income families more Medicaid, we should give them cash instead.

Here is one way to do that.

Private companies managing Medicaid (or the state itself) should be able to make deposits to Health Savings Accounts (HSAs) that would cover, say, all primary care. Enrollees would be restricted to using the money for health care during an insurance year. With these funds, they would be able to pay market prices (instead of Medicaid fees) at doctor’s offices, walk-in clinics and urgent care centers—allowing them to buy medical care the way they buy food with food stamps. This would allow low-income families to have the same health care opportunities that middle-income families have.

At the end of the insurance period, they could withdraw any unspent funds for any purpose. If there were no taxes or penalties for non-medical withdrawals, health care and non-health care would be trading against each other on a level playing field under the tax law. People wouldn’t spend a dollar on health care unless they got a dollar’s worth of value.

An early study by the RAND Corporation suggests that these accounts could reduce Medicaid spending by 30 percent. Excluding payments for the disabled and nursing home care, the savings would amount to almost $1 trillion over ten years. This saving would be shared by the beneficiaries and the taxpayers who fund Medicaid.

This is one way to resolve the impasse in the Senate over the House reconciliation bill. HSAs for Medicaid are a way to make the program better for enrollees and cut spending at the same time."