Deadweight losses really do matter in determining if Medicaid is more cost-effective than employer plans

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  • The conclusion of Urban Institute researchers that Medicaid is more “cost-effective” than ESI for low income adults should be resisted quite fiercely.

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  • I never claimed that the elderly or disabled could or should be covered by ESI. I focused my attention on the low income nonelderly adult population.

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  • The conclusion to shift low-income adults out of employer plans into Medicaid is flawed once we take into account Medicaid’s true social costs–inclusive of deadweight losses.

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I appreciate Prof. Reinhardt’s thoughtful and civil response [1] to my post suggesting that Sally Pipes may be right in her claim that employer-sponsored health insurance (ESI) being less expensive than Medicaid. My argument is that accounting for deadweight losses tips the scales back in favor of ESI. Prof. Reinhardt concedes that deadweight losses are very real, but demurs that they are irrelevant in this side-by-side comparison since the population being discussed would need taxpayer help in paying for their coverage.

I concede that if our choice is between fully tax-financed ESI and Medicaid, deadweight losses become irrelevant in the cost comparison. We are then back to the conclusions reached in the Urban Institute study that Prof. Reinhardt originally introduced: Medicaid is substantially less expensive than ESI.  But Prof. Reinhardt has pulled a bit of an analytic sleight-of-hand in trying to convince you he is right.

He starts by asking and decisively answering what most readers might view as a rhetorical question: “Would it be economically and ethically feasible to have employers sponsor health insurance for this mixed, high-risk population? Surely not.”  He then walks through components of the Medicaid population to drive home his point:

  •     “By definition, the pauperized elderly population eligible for dual Medicare-Medicaid coverage—often in nursing homes—would not be candidates for employment.” (No quarrel there)
  •     “Nor would the blind and disabled, except in very rare circumstances.” (No quarrel there)
  •     “Nor would be the children covered by Medicaid.” (Caveat: children may well obtain ESI through a parent even if they themselves don’t work)

Thus, for a large swath of the Medicaid population, I have no disagreement with Prof. Reinhardt. A comparison with ESI is irrelevant since ESI is not a plausible mechanism for insuring such individuals.  But of course I never claimed in my original piece that the elderly or disabled could or should be covered by ESI. What I focused my attention on is the very population used by Urban Institute researchers: low income nonelderly adults.

And this is where Prof. Reinhardt and I part company. In referencing the moms of the children covered by Medicaid, he assures us: “If they were employed by an employer sponsoring health insurance, they would not be in Medicaid in the first place. If they are working and are in Medicaid, it must mean that their employer pays them very low wages and does not sponsor insurance, as many employers with predominantly low-wage workers do not.”

But this assertion is flatly contradicted by the facts on the ground. And it dodges the fact that the vast majority of low income adults who would gain Medicaid coverage under Obamacare at not moms, but childless adults. Among nonelderly adults who are poor, fully 24% had private insurance in 2012. And among nonelderly adults up to 138% of poverty, there are as many who have private coverage (predominantly ESI) as who have Medicaid coverage.

Of course, Obamacare seeks to change all that by forcing every single one of these adults onto Medicaid. This “crowd out” of private coverage is one of the more tragic consequences of how Obamacare is designed. It creates a “Sophie’s choice” that I’ve written about repeatedly.  As you can plainly see on the chart, for every 2 uninsured who might gain coverage through Medicaid, there would be someone whose private coverage would be displaced by Medicaid. But it’s actually worse than this since even the rosiest projections of Obamacare will only result in half the uninsured getting coverage. So essentially, were Medicaid expanded in the manner that Obamacare’s designers intended, we’d end up displacing one low income adult from private coverage for every uninsured low income adult who gained Medicaid coverage.

The combination of reducing incentives to work and replacing superior private coverage with Medicaid does low income adults no favor.  Other Forbes contributors such as Grace-Marie Turner and Avik Roy have eloquently articulated why shoveling tens of millions more people into the broken Medicaid system is a singularly bad idea[2].

Which is why the conclusion of Urban Institute researchers that Medicaid is more “cost-effective” than ESI for low income adults should be resisted quite fiercely. The clear conclusion of their analysis (which notably avoids any mention of deadweight losses) is that Medicaid is more cost-effective than ESI. But such a conclusion is fatally flawed when it leaves out a factor that would inflate the cost of Medicaid by 44%. An uninformed policymaker might well conclude from their analysis that shifting low income adults out of the employer plans they already have and into Medicaid might be a smart idea–one that could actually save society money. My simple argument is that such a conclusion is flawed once we take into account Medicaid’s true social costs–inclusive of deadweight losses.  I would hope that Prof. Reinhardt would agree with this proposition.


[1] Would that all Princeton professors so civil, there would be no need for the cottage industry that has cropped up to plead with former Princeton Prof. Paul Krugman for greater civility.

[2] Indeed, Avik Roy has written an entire book on the topic.

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