Federal Reserve Bank of Philadelphia Consumer Finance Institute: 'Missouri's Medicaid Contraction, Consumer Financial Outcomes'

PHILADELPHIA, Pennsylvania, Nov. 3 -- The Federal Reserve Bank of Philadelphia's Consumer Finance Institute issued a working paper (No. 20-42) entitled "Missouri's Medicaid Contraction and Consumer Financial Outcomes".

The paper was written by Nathan Blascak, Vyacheslav Mikhed and visiting scholar James Bailey, who is also from Providence College.

Here are the excerpts:

Abstract

In July 2005, a set of cuts to Medicaid eligibility and coverage went into effect in the state of Missouri. These cuts resulted in the elimination of the Medical Assistance for Workers with Disabilities program, more stringent eligibility requirements, and less generous Medicaid coverage for those who retained their eligibility. Overall, these cuts removed about 100,000 Missourians from the program and reduced the value of the insurance for the remaining enrollees. Using data from the Medical Expenditure Panel Survey, we show how these cuts increased out-of-pocket medical spending for individuals living in Missouri. Using data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP) and employing a border discontinuity differences-in-differences empirical strategy, we show that the Medicaid reform led to increases in both credit card borrowing and debt in third-party collections. When comparing our results with the broader literature on Medicaid and consumer finance, which has generally measured the effects of Medicaid expansions rather than cuts, our results suggest there are important asymmetries in the financial effects of shrinking a public health insurance program when compared with a public health insurance expansion.

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Introduction

What is the value of Medicaid, and how do Medicaid recipients react to changes in the program? These questions have increased in importance as many states have expanded their programs in response to the Affordable Care Act (ACA), while others consider new forms of Medicaid reforms and restrictions such as work requirements. Since Medicaid's origin in 1965, the general trend has been to expand eligibility. The program originally tied Medicaid eligibility to eligibility for cash assistance (Aid for Families with Dependent Children), but it has since expanded to cover some disabilities, long-term care, and low-income individuals without children. Because of these expansions, potential Medicaid recipients have generally opted to take advantage of their eligibility, which has led to enrollment increasing from 4 million individuals in 1966 to 73.8 million in 2017./1

The body of research on the effects of Medicaid expansions is extensive and has covered a wide variety of outcomes, including health, employment, provider behavior, and consumer financial health. This research on financial outcomes has generally found that individuals who received coverage (or were eligible for coverage) received substantial financial benefits, including reduced out-of-pocket medical spending (Finkelstein et al., 2012; Baicker et al., 2013), reduced medical debt in collections (Finkelstein et al., 2012; Hu, Kaestner, Mazumder, Miller, and Wong, 2018; Miller, Hu, Kaestner, Mazumder, and Wong, 2020; Brevoort, Grodzicki, and Hackmann, 2020), higher credit scores (Miller et al., 2018; Brevoort et al., 2020) and a lower likelihood of bankruptcy (Gross and Notowidigdo, 2011). These financial benefits to recipients are unsurprising, given that Medicaid coverage is relatively generous as health insurance, covering most medical services with low to zero premiums and cost sharing.

While this previous research is well identified and provides estimates of the financial effects of recent Medicaid expansions, it does not necessarily indicate what the effects of future Medicaid program contractions would be. Expansions and contractions to a public program could have asymmetric effects along a number of dimensions, and research on Tennessee's 2005 Medicaid reform suggests this to be the case for Medicaid for general hospitalizations (Ghosh and Simon, 2015), behavioral health-care hospitalizations (Maclean, Tello-Trillo, and Webber, 2020), and financial well-being (Argys, Friedson, Pitts, and Tello-Trillo, 2020). Understanding the impacts of program contractions are of particular interest, given the current policy landscape as recent proposals for Medicaid program reforms most commonly discussed by states are not just simple reversals of the recent expansions of eligibility to low-income adults. Instead, states have been proposing either new forms of eligibility requirements, such as work requirements or more frequent income verification, or making their programs less generous to recipients by introducing or increasing premiums, deductibles, and copays or removing coverage for certain types of services.-2

To examine the effects of a public insurance program contraction on consumer financial outcomes, we study the effect of a major reform to Missouri's Medicaid program in 2005. This reform resulted in approximately 100,000 Missourians losing their Medicaid eligibility and lower benefit generosity for the remaining enrollees. Unlike Tennessee's Medicaid reform, in which the majority of the changes were centered on the disenrollment of a specific subpopulation from the program, Missouri's reform was much broader in scope.

In the first half of the paper, we show that the contraction of Missouri's Medicaid program led to lower Medicaid enrollment and health-care spending. Using data from the restricted version of the Medical Expenditure Panel Survey (MEPS), we first estimate that the probability of an individual in Missouri being on Medicaid declined by 4 percentage points, and the uninsured rate increased by 2 percentage points in the years following the reform. These results are similar to those found by Zuckerman, Miller, and Pape (2009), who estimated that the uninsured rate in Missouri increased by 1.7 percentage points following the reform. We also find that the Medicaid cut led to a 30 percent increase in out-of-pocket (OOP) medical spending and an 18 percent decrease in Medicaid spending for individuals living in Missouri.

These estimates are consistent with previous studies that have shown that Medicare expansions generally decrease out-of-pocket expenses by 28 percent to 33 percent (Blavin, Karpman, Kenney, and Sommers, 2018; Gotanda, Jha, Kominski, and Tsugawa, 2020).

In the second half of the paper, we provide evidence that Missouri's Medicaid contraction led to increased financial strain for Missouri residents by using individual-level credit report data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP). To estimate the causal effect of the Medicaid contraction on financial health, we implement a straightforward border discontinuity differences-in-differences empirical design to compare individuals living in census blocks within a 10-mile radius on either side of the Missouri state border. Similar to other studies that have used anonymized credit bureau data, we estimate intent-to-treat (ITT) effects as we are unable to observe insurance status for the individuals in our CCP data.

Consistent with our earlier results that the Medicaid contraction increased overall OOP health-care spending, we find that individuals in Missouri had higher amounts of debt in third-party collections, owned more bankcards, and held higher bankcard balances. We estimate that the Medicaid contraction led to increases of 0.04 accounts in third-party collections and $64 in debt owed to a third-party debt collector, both of which represent 13 percent increases relative to their pre-reform means. We also find that the number of bankcards held increased by 0.02 accounts (1 percent), bankcard balances increased by $133 (3 percent). Back-of-the-envelope calculations for average treatment on the treated (ATT) effects suggest that credit card borrowing increased by $558 to $915, bankcard accounts increased by 0.07 0.12, and debt in collections increased by $271 to $444.

Our results for debt in collections, an often-used measure of financial distress when using credit report data, are on the lower end of those reported in the prior literature. Estimates from studies on recent Medicaid expansions have found that debt in collections can be reduced by $390 to $1,231 (Finkelstein et al., 2012; Hu et al., 2018; Brevoort et al., 2020; Miller et al., 2020). Given that the upper bound of our estimates falls in the lower end of those from the previous research may indicate that financial effects from a contraction in Medicaid are asymmetric to those from an expansion. Given that losing health insurance is both qualitatively and quantitatively different than gaining health insurance, one may expect these effects to be asymmetric (Garthwaite, Gross, and Notowidigdo, 2014; Ghosh and Simon, 2015; DeLeire, 2019; Tello Trillo, 2020). More broadly, our results are consistent with those of Argys et al. (2020), who found that individuals in Tennessee experienced worse financial outcomes after the state contracted its Medicaid program.

We identify two major reasons why Missouri's Medicaid contraction could be particularly informative about the potential effects of future Medicaid program cuts. First, because Medicaid has predominately expanded over time, there are relatively few studies about Medicaid contractions, and the few studies that have been done have largely focused on Tennessee's 2005 cut./3

By adding a second case with Missouri, we can establish which results are "stylized facts" about Medicaid cuts and which are idiosyncratic effects in a single state. Second, the Missouri contraction affected populations and parts of the program that are very different from the recent ACA expansions or the 2005 Tennessee cut, which primarily affected childless adults. Instead, the Missouri cut, which contracted or eliminated specific programs and made coverage generally less generous, has more in common with potential future Medicaid reforms currently being discussed by various states, such as the introduction of work requirements.

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Conclusion

Our study provides new evidence on the effect of a Medicaid contraction on the financial health of those affected. Analyzing Missouri's 2005 Medicaid cut, we find substantial declines in Medicaid eligibility, coverage, and spending. This in turn led to higher out-of-pocket health-care spending, increased borrowing, and increased financial strain for Missouri residents. These results are qualitatively similar to previous studies of recent Medicaid expansions and of the 2005 Medicaid cut in Tennessee (Argys et al., 2020) and reinforce the existing evidence that health insurance provides significant financial protections.

We estimate that the Medicaid cut led to a $64 increase in debt in third-party collections in Missouri, which implies an average treatment-on-the-treated effect of approximately $546 per Medicaid recipient. This result is broadly consistent with previous work that found Medicaid expansions reduced debt in collections by $390 (Finkelstein et al., 2012) to $1,231 (Brevoort et al., 2020) per new recipient. Comparing these estimates to ours, we argue that Medicaid expansions and contractions may have asymmetric effects on financial distress, with contractions having smaller effects than expansions. We also find evidence that the Medicaid contraction led to an increase credit card borrowing of $134, which translates to an ATT effect of $558 to $915 per person. These results, taken together, imply that a decrease in the generosity of health-insurance benefits have important spillovers into the credit market behavior of lower socioeconomic status households.

Our results for financial distress seemingly contrast with those of Argys et al. (2020), as our estimates from Missouri imply relatively smaller financial effects because of the contraction, while Argys et al. (2020) find larger financial effects than the previous literature because of the TennCare disenrollment in Tennessee. While we find a different type of asymmetry, we do not believe our results necessarily contradict those of Argys et al. (2020) because of the qualitative differences in the Medicaid reforms between the two states. In particular, the Missouri Medicaid reform was primarily a reduction in the generosity of health insurance for the majority of Medicaid enrollees, while the Tennessee reform disenrolled a large number of participants from their program. It may also be the case that newly enrolled Medicaid beneficiaries examined in the previous studies have higher medical expenses, and thus experience larger financial benefits, than the Medicaid-eligible individuals in our study, who were already covered by Medicaid for some time.

Given the current policy discussions that states are having regarding Medicaid reform, our study provides important information regarding the potential financial spillover effects that may result from decreasing benefit generosity or restricting eligibility. In particular, acknowledging the presence of asymmetries in these effects is important to properly assess the costs and benefits of any policy change, especially for populations that may be either credit constrained or less able to take on and manage additional debt.

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REPORT and FOOTNOTES: https://www.philadelphiafed.org/-/media/frbp/assets/research-and-data/publications/working-papers/2020/wp20-42.pdf?la=en