Medicaid Eligibility Policy and the Crowding-Out Effect:

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Medicaid Eligibility Policy and the Crowding-Out Effect: Did Women and Children Drop Private Health Insurance to Enroll in Medicaid?

Issue Brief No. 03 | October 1996

During the late 1980s and early 1990s, the federal government substantially expanded Medicaid eligibility for children and pregnant women. By 1992, roughly a third of all children in the United States qualified for Medicaid, and between 40 and 50 percent of women of childbearing age were eligible for Medicaid coverage of pregnancy-related services. This expansion coincided with a decline in the number of people with employment-based insurance coverage, prompting researchers to investigate whether Medicaid expansions had contributed to this decline -- a phenomenon known as the crowding-out effect. This Issue Brief examined the research findings on crowding out and explored the health policy implications.

Eligibility Expansion

Historically, Medicaid eligibility for children and pregnant women had been tied to participation in the Aid to Families with Dependent Children (AFDC) program. This linkage effectively limited eligibility to single-parent households with incomes well below the poverty line.

Starting in the late 1980s, Congress passed a series of Medicaid eligibility expansions. By 1992, states were required to cover all pregnant women and children up to age 6 with incomes at or below 133 percent of poverty. States had the option to receive federal matching funds to cover all pregnant women and infants with incomes up to 185 percent of poverty, and more than half chose to do so. Additionally, children born after September 30, 1983, to families with incomes up to 100 percent of poverty were automatically eligible for Medicaid regardless of family composition.

Congress expanded eligibility to increase the proportion of the population with health coverage. A potential drawback, however, was the possibility of crowding out private insurance coverage. Because Medicaid substituted for what would have been private insurance for some of the newly eligible, the net increase in the insured population was smaller than the gross increase. This limited the effectiveness of the public funds spent on expanding coverage. The question debated at a seminar sponsored by the Center for Studying Health System Change was: how much smaller was the net increase, and did it matter?

Putting the Issue into Perspective

Measuring the crowding-out effect was complicated by the difficulty of separating it from secular declines in employer-sponsored insurance and from variations in employment and Medicaid eligibility tied to the business cycle. Rising health care costs and changes in employment structure had led to a decline in the percentage of individuals with employer-based coverage. Much of the shift from employer-sponsored to Medicaid coverage during this period may have been attributable to these secular declines rather than to crowding out.

Although this discussion focused on Medicaid, crowding out was not unique to it. It occurs to some degree in all social insurance programs because of the practical and political difficulties of targeting benefits precisely to those who most need them. Social Security, for example, had long been argued to displace private savings. In recent years, some people who received a tax subsidy by putting money into an individual retirement account (IRA) would have saved that money anyway -- in effect, the IRA was crowding out taxable savings accounts.

The Cutler-Gruber Study

David Cutler of Harvard University and Jonathan Gruber of the Massachusetts Institute of Technology were the first to estimate a crowding-out effect linked to Medicaid expansions. In an April 1995 working paper for the National Bureau of Economic Research, they observed that the population made newly eligible by the expansions was much less disadvantaged than those who had qualified under earlier rules. Only 20 percent of the newly eligible had incomes below the poverty line, and nearly two-thirds already had private health insurance. The impact of expanded eligibility also varied considerably by state -- for example, eligibility rose 43 percent in Texas but only 4 percent in Utah.

Using data from the Current Population Survey (CPS) from 1987 through 1992, Cutler and Gruber estimated the extent to which expanded eligibility was offset by declines in private health insurance among the newly eligible. Their analysis relied on cross-state and cross-age variations in the magnitude and timing of the expansions. Based on this work, they concluded that approximately 50 percent of the increase in Medicaid coverage associated with the eligibility expansions was offset by a corresponding reduction in private insurance coverage.

The Dubay-Kenney Study

Other researchers studied the crowding-out effect and arrived at results that appeared substantially different. In October 1995, Lisa Dubay and Genevieve Kenney of the Urban Institute reported on two studies they had conducted, one for the Health Care Financing Administration and one for The Robert Wood Johnson Foundation. Although they used the same data, their approach differed from Cutler and Gruber's in several ways.

Dubay and Kenney controlled for secular trends in employer-sponsored coverage by comparing changes between 1988 and 1993 in private coverage for Medicaid-eligible children under age 11 with those for men aged 18 to 44, a group not eligible for Medicaid. They analyzed crowding out separately for the poor (below 100 percent of poverty) and the near-poor (between 100 and 133 percent of poverty), reasoning that the potential for crowding out might be greater among individuals with family incomes above the poverty line, who were more likely to have private insurance.

Using this approach, Dubay and Kenney found little evidence of crowding out among children or pregnant women with incomes below the poverty line. Among the near-poor, they estimated that 21 percent of the Medicaid enrollment increase for children under age 11 and 45 percent for pregnant women was offset by declines in private insurance. Among poor children, the rate was just 8.5 percent. Overall, they estimated that 14 percent of the Medicaid enrollment increase for pregnant women and 12 percent for children under age 11 was attributable to crowding out of private coverage.

Common Ground Between the Two Studies

At first glance, the two studies' results appeared very different. Both concluded that expanded Medicaid eligibility resulted in some crowding out of private health insurance, but the magnitude varied widely. The key to understanding the discrepancy lay in the populations studied. Cutler and Gruber focused exclusively on those made newly eligible by the expansions -- a population with higher incomes than those previously eligible, even within the poor and near-poor categories. Dubay and Kenney, by contrast, examined the entire Medicaid population of children under 11 and pregnant women. Moreover, Cutler and Gruber's estimate included indirect effects on family members who themselves were not eligible for Medicaid but who dropped employer-based coverage because a child or other family member had become eligible.

When the same population was examined, the estimates from the two studies became much more similar. Both found crowding out to be much less of an issue among children than among pregnant women. Dubay and Kenney also found income level to be a decisive factor, with crowding out occurring to a much greater extent among the near-poor than the poor.

Both groups of researchers acknowledged shortcomings in using CPS data for these estimates. One significant issue was that the CPS asked individuals about the types of health insurance they had over the past year rather than about the duration of or transitions between types of coverage, so it might not capture the episodic nature of health insurance for many low-income people. Frequent job changes, often punctuated by periods of unemployment, could result in people having coverage one month but not the next. These problems called for panel survey research, and Urban Institute researchers were embarking on such a study using the federal Survey of Income and Program Participation (SIPP).

Understanding Individual and Employer Responses

While the studies showed evidence of crowding out, CPS data -- or any other survey data -- could not reveal the motivating factors that might cause employer-provided coverage to decline as Medicaid eligibility expanded. One hypothesis was that employers stopped offering health insurance or increased cost-sharing to encourage low-income workers to switch to Medicaid. However, Cutler and Gruber found no evidence that employers used knowledge of Medicaid expansions to drop coverage for all employees, though they did find evidence of increased cost-sharing as eligibility expanded.

Another hypothesis was that as Medicaid eligibility was extended, employees might be less likely to accept employer-sponsored coverage or might drop it for themselves or their dependents. Given the potentially high cost of private insurance through premiums, deductibles, and coinsurance, pregnant women or women with Medicaid-eligible children faced an incentive to decline or drop employer-based coverage. Cutler and Gruber did find some evidence that reductions in employer-sponsored coverage arose from workers declining insurance when it was offered.

Benefits of the Expansions

Estimates of crowding out likely overstated the costs of imperfect targeting, because Medicaid was often more valuable to low-income individuals than private insurance. For low-income people, private health insurance had a number of drawbacks: it might offer only rudimentary coverage, typically excluding preventive services that Medicaid covered. Under a typical private policy, individuals paid roughly one-third of their total medical costs out of pocket through premiums, deductibles, and copayments.

Insurance tied to employment posed particular problems for people whose lives were characterized by high job mobility and periods of unemployment. In these circumstances, Medicaid could provide more comprehensive and more consistent coverage than employer-sponsored health insurance. There was evidence that Medicaid had important health benefits for the population it served. As Lisa Dubay noted, given that the expansions took place when employer-sponsored coverage was deteriorating, the number of pregnant women and children without insurance would almost certainly have risen without the more generous Medicaid coverage policies.

John Holahan of the Urban Institute pointed to another dimension: income redistribution. Although the cost of employer-sponsored health coverage was borne by employers and workers, much of the burden ultimately fell on workers through lower wages as well as premiums and cost-sharing. Expanding Medicaid eligibility was a way of shifting to the more affluent some of the burden of providing health insurance for the poor and near-poor.

Alternatives to Expanding Eligibility

From a health policy perspective, one question raised by the crowding-out discussion was whether a more effective and efficient way to provide health coverage to the uninsured existed. Alternatives to expanding Medicaid eligibility included direct provision of care to the poor or offering subsidies to low-income people to purchase private insurance. Holahan noted, however, that designing such a program without subsidizing low-income people who already had private coverage was difficult -- in other words, subsidizing private insurance would carry its own substantial crowding-out effect. Nor would such a program necessarily be less costly, because experience suggested that subsidies needed to be fairly generous to persuade people to buy the subsidized product.

Crowding out might be reduced by introducing income-based fees for Medicaid services or offering a leaner benefits package to higher-income enrollees. But experience with other public programs suggested these approaches could become administratively cumbersome and costly. Under the existing Medicaid system, any eligible recipient in a given state could get covered services once proof of eligibility was established. If levels of eligibility and benefit schedules varied, providers would need to determine at the point of service which recipient was entitled to which services -- adding cost and burden to an already administratively difficult system and potentially delaying access to services.

Meeting Social Needs

Expanding Medicaid may have been the least costly and most fiscally progressive way of paying for health care for the near-poor, and crowding out may have been a necessary tradeoff for increasing the proportion of the population with health insurance. Whether the glass was viewed as half full or half empty, researchers agreed that expanded Medicaid eligibility had led to more needy people getting coverage.

Seminar Panelists

David Cutler, Ph.D., Harvard University; Lisa Dubay, Sc.M., The Urban Institute; Jonathan Gruber, Ph.D., Massachusetts Institute of Technology; John Holahan, Ph.D., The Urban Institute; Genevieve Kenney, Ph.D., The Urban Institute; Katherine Swartz, Ph.D., Harvard University. Moderator: Paul B. Ginsburg, Ph.D., President, Center for Studying Health System Change. Based on a seminar held in Washington, D.C., on May 14, 1996.

Sources and Further Reading

Cutler, D. and Gruber, J. National Bureau of Economic Research Working Paper, April 1995. Dubay, L. and Kenney, G. The Urban Institute, October 1995. Center for Studying Health System Change, Issue Brief No. 03, October 1996.