Medicaid and the Elderly
De Nardi, Mariacristina, French, Eric, Jones, John Bailey, Gooptu, Angshuman, Economic Perspectives
Introduction and summary
Expenditures on medical care by Medicaid and Medicare, America's two main public health insurance programs, are large and growing rapidly. Although Medicare is the main provider of medical care for the elderly and disabled, it does not cover all medical costs. In particular, it covers only a limited amount of long-term care expenses (for example, nursing home expenses). The principal public provider of long-term care is Medicaid, a means-tested program for the impoverished. Medicaid now assists 70 percent of nursing home residents (1) and helps the elderly poor pay for other medical services as well. In 2009, Medicaid spent over $75 billion on 5.3 million elderly beneficiaries. (2)
An important feature of Medicaid is that it provides insurance against catastrophic medical expenses by providing a minimum floor of consumption for households. Although Medicaid is available only to "poor" households, middle-income households with high medical expenses usually qualify for assistance also. Given the ongoing growth in medical expenditures, Medicaid coverage in old age is thus becoming as much of a program for the middle class as for the poor (Brown and Finkelstein, 2008).
Another important feature of Medicaid is that it is asset and income tested; in contrast, almost all seniors qualify for Medicare. This implies that Medicaid affects households' saving decisions, not only by reducing the level and risk of their medical expenses, but also by encouraging them to consume their wealth and income more quickly in order to qualify for aid (Hubbard, Skinner, and Zeldes, 1995). Although Medicaid covers poor people of all ages, this article focuses on Medicaid's coverage for the elderly.
Many recent proposals for reforming Medicaid could have significant effects on the financial burdens of the elderly, on the medical expense risk that they face, and on their saving decisions. Moreover, Medicaid is a large and growing component of the federal budget. The share of total federal, state, and local government expenditures absorbed by Medicaid rose from less than 2 percent in 1970 to almost 7 percent in 2009, (3) and it is expected to increase even more in the future. Controlling the cost of Medicaid is an important component in correcting the federal government's longterm fiscal imbalance.
In this article, we describe the Medicaid rules for the elderly and discuss their economic implications. We focus on the rules for single (that is, never married, divorced, or widowed) individuals to avoid the additional complications involved in considering couples. The main difference between singles and couples is that the income and asset limits for Medicaid eligibility are higher for couples.
Medicaid is administered jointly by the federal and state governments, but each state has significant flexibility on the details of implementation; hence, there is large variation across states in income and asset eligibility and in coverage. This variation may well provide elderly people in different states with different saving incentives, and it might even encourage them to move from one state to another. We focus on finding the features common to all states, and identifying the most salient state-level differences.
Overview of the Medicaid program
Medicaid and Medicare were created by the Social Security Act Amendments of 1965. Although the program was initially intended to cover the population on welfare (for example, recipients of Aid to Families with Dependent Children, AFDC, or Supplemental Security Income, SSI), over time legislation has expanded coverage to non-welfare recipients overwhelmed by their medical costs. Box 1 provides a chronology of important Medicaid-related legislation for the elderly. Two key themes emerge from box 1. First, Medicaid has increased the number of services provided over time. Second, Medicaid has attempted to limit the abuse of the system by using increasingly stringent and comprehensive asset tests to determine eligibility. …