Finance professor Jeffrey R. Brown says his study is the first to demonstrate how Medicaid stifles demand for private policies by creating financial disincentives that steer people toward the no-cost safety net, which covers nursing-home and other long-term care costs once their finances are exhausted.
CHAMPAIGN, Ill. – The nation’s flawed-but-free Medicaid program discourages most Americans from buying long-term health insurance that could provide better care and spare their life savings, a new study co-written by a University of Illinois professor says.
Finance professor Jeffrey R. Brown says the study is the first to demonstrate how Medicaid stifles demand for private policies by creating financial disincentives that steer people toward the no-cost safety net, which covers nursing-home and other long-term care costs once their finances are exhausted.
“By modeling the lifetime financial implications of the insurance decision, we discovered that it is rational for most people to not buy private policies, even though Medicaid is actually pretty lousy insurance because it forces you to impoverish yourself first,” he said.
A core problem is that private policies require paying for much of the same coverage that comes free under Medicaid once nest eggs dip, said Brown, recently nominated by President Bush to serve on the board of trustees for the nation’s Medicare and Social Security programs.
So while private insurance offers broader coverage and protects personal assets, the net benefits amount to just 20 to 40 cents on every dollar of premiums after taking into account what Medicaid would have covered at no charge, according to the study, which will appear in The American Economic Review.
“The incremental benefits of the policy, if you think about it relative to the benefits you would have received from Medicaid if you did not buy private insurance, turn out to be quite low,” said Brown, director of the Center on Business and Public Policy in the U. of I. College of Business.
He calls the discrepancy an “implicit tax” on private policies, created by the mere existence of Medicaid.
Brown says the findings help explain why only about one in 10 Americans buy private policies, despite studies that show a 65-year-old man has a 27 percent chance of a nursing-home stay that can top $70,000 a year. The odds are higher for women, at 44 percent.
“You have this low quality public insurance program crowding out potentially better private insurance policies. And yet because the bad one is free to the consumer, it is still in the consumer’s best interest to take the free bad one rather than buy the expensive good one,” Brown said.
As a result, Medicaid – intended as a payer of last resort for the poor – now covers a third of long-term care expenses in the U.S., a problem Brown says will only worsen with medical expenses rising and nearly 80 million baby boomers nearing their retirement years.
While the study zeroes in on the problem, it offers no easy fixes, he said.
“Unfortunately, this turns out to be as close to an intractable problem as I’ve ever encountered,” said Brown, a senior economist with the President’s Council of Economic Advisers in 2001-2002.
“It’s actually a somewhat depressing conclusion, that the very existence of Medicaid means you’re not going to have a vibrant private market,” he said. “And if you don’t have a vibrant private market then Medicaid is going to end up paying most of the freight. And while Medicaid may be free to the individual when they qualify for it, it is certainly not free to the taxpayers who support the program.”
Turning Medicaid’s coverage of long-term care into a universal program similar to Medicare would be too costly, and scrapping the safety net to force private insurance buys isn’t an attractive option because it would leave the poor with no coverage, Brown said. Tax incentives to promote private policies already have been tried, with little success.
But Brown hopes a solution could still rise from his study, “The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market,” co-written by Massachusetts Institute of Technology economist Amy Finkelstein.
“The nature of scientific progress is that you proceed in steps,” Brown said. “I think this paper takes an important step in identifying the underlying problem, and hopefully it wasn’t the last. The hope is that even if I don’t have my eureka moment, maybe other researchers who read this study will.”
Editor’s note: To contact Jeffrey R. Brown, call 217-333-3322; e-mail brownjr@illinois.edu.
