Would the Poor Prefer Cash Instead of Medicaid?
Medicaid is the nation's largest means-tested transfer program, and even conservatives generally acknowledge that it makes its recipients better off. It's hard not to make people better off when you're giving them something for free that they would otherwise have to pay for. At the very least, those people now have more money in their pocket that they can use to pay for something else.
The question still remains: How much better off? What, in other words, is the value of the transfer to the people who are getting health care through Medicaid? In a new paper, Amy Finkelstein, Nathaniel Hendren and Erzo F.P. Luttmer note that the Congressional Budget Office values the transfer at the amount of money the government is spending on Medicaid. But of course, the value to recipients of any "in kind" benefit has only a weak relationship to the actual amount of money spent. If I give you a Doberman pinscher and $3,000 worth of shampoo samples marked "not for resale," I have certainly transferred something with value, but most people would probably not pay $3,000-plus for it, even if they had the money.
So instead, they looked at data from the Oregon Medicaid Study to try to get a more nuanced assessment of the actual value to the people the benefit is supposed to be for. Here's what they came up with: "Our baseline estimates of the welfare benefit to recipients from Medicaid per dollar of government spending range from about $0.2 to $0.4, depending on the framework, with a relatively robust lower bound of about $0.15." You read that right: 15 cents of value for every dollar spent.
Undoubtedly one can quibble with various aspects of their model, and of course, the data they're relying on comes from a study that ran only two years, so it may have missed longer-term health benefits that the study couldn't pick up. Still, as methods go, it's considerably more sophisticated than just assuming that recipients value every dollar of medical spending at a full dollar, and only and exactly a full dollar.
And yet, something still feels unsatisfying, doesn't it? The logical inference -- that we should cancel Medicaid and give people cash -- surely isn't quite right. Right?
Perhaps you are thinking that people really like health care benefits, so this result must be wrong. And it's true, people do really like health care benefits. Unions will sacrifice quite a lot of compensation to keep those gold-plated health plans intact. But it doesn't necessarily then follow that low-income people who qualify for Medicaid would therefore prefer Medicaid over a simple cash transfer. People like a lot of things, and when your budget is tight, you might well prefer a reliable car or money for your daughter's prom dress to antibiotics for your strep throat.
I think the main problem has to do with the way that economists calculate utility, and what that can and cannot tell us about public policy. Your personal utility for some good or service is, of course, not possible to accurately measure. So one way to assess what your utility is is to compare your valuation of that stuff with your valuation of other stuff. If you would voluntarily exchange one thing for another, then we say that you must value the object you get as equal to or higher in value than the one you traded away.
Let's reduce to absurdity to see the problem with this economic model as a guide for public policy. Using this definition of utility as your sole guide to public policy sort of implies that the government should subsidize cocaine for addicts. (Stay with me here, and it's OK to laugh. I'm mostly joking.) Serious cocaine addicts will voluntarily exchange most of the money they have for the drug. Their main constraint is the amount of money they have, not their utility for the drug. Yet most of the price they are paying for the cocaine is the black market premium you have to pay a dealer for trafficking in an illegal drug; the price that labs pay for an authorized gram of research-grade cocaine is negligible. So I hear. Anyway, by strict economic logic, we could generate massive utility increases by having the government buy legal cocaine and distribute it to drug addicts.
As a philosopher once pointed out to me, the argument that addicts "don't really want to do drugs" (because doing drugs means losing job, health, family, etc.) could just as easily be an economic argument that cocaine is immensely valuable (because addicts value it higher than job, health, family, etc.).
You are probably shaking your head and saying "This is so wrong." You're right. This is wrong. But why?
Well, for one thing, because people don't always know what's best for them. Cocaine hijacks the reward center of your brain and distorts your decisions by getting you to trade the stuff those rewards are supposed to encourage for a chemical substitute that can kill you. Children are not competent to make their own decisions, and would not be better off with cash than with three squares and a roof over their heads. Now, we should be very, very, very careful about how often we invoke this argument to limit the agency of others. But it is not ridiculous to concede that sometimes, it's OK to say "Yes, this person would like something else more, but we're going to give this to them instead, because that's better for them." For some policy makers, Medicaid is a good example: provide health care to people who are so poor that they might not spend discretionary cash on health care, rather than give them money that could be used for some other good.
But this approach has some problems. Those people are adults, not children; how do we say we know what they want better than they do? But nonetheless, I think you can argue that no, we shouldn't give people subsidized cocaine, and we should give them health care. (I'm not saying you have to endorse the latter view. I'm just saying you can make a coherent argument.)
Every society has certain classes of goods that it believes all members of the society should have, and other classes of goods that we're OK with distributing unevenly. These lists can be long or short, but are not solely determined by economic models like utility. There are other, basically moral considerations, often fairly intuitive, like "People shouldn't starve in a rich society" or "I don't care how much you like cocaine, having a job or a family is better than doing cocaine, and I won't help you afford cocaine."
This new paper absolutely should influence whether we put health care on the list of things that everyone should have. So should the papers about the Oregon Medicaid Study that preceded it. But no study will ever provide the complete answer. Politics and moral reasoning are even more tricky than math.
And before you ask, yes, they try to account for standard bounded-rationality problems like risk aversion.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Megan McArdle at firstname.lastname@example.org
To contact the editor on this story:
Philip Gray at email@example.com