Work Incentives of Medicaid Beneficiaries and the Role of Asset Testing

53 Pages Posted: 12 Sep 2013 Last revised: 8 Jul 2016

Svetlana Pashchenko

University of Georgia

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo)

Date Written: July 7, 2016

Abstract

Should asset testing be used in means-tested programs? These programs target low-income people, but low income can result not only from low productivity but also from low labor supply. We aim to show that in the asymmetric information environment, there is a positive role for asset testing. We focus on Medicaid, one of the largest means-tested programs in the US, and we ask two questions: 1) Does Medicaid distort work incentives? 2) Can asset testing improve the insurance-incentives trade-off of Medicaid? Our tool is a general equilibrium model with heterogeneous agents that matches many important features of the data. We find that 23% of Medicaid enrollees do not work in order to be eligible. These distortions are costly: if individuals' productivity was observable and could be used to determine Medicaid eligibility, this results in substantial ex-ante welfare gains. When productivity is unobservable, asset testing is effective in eliminating labor supply distortions, but to minimize saving distortions, asset limits should be different for workers and non-workers. This work-dependent asset testing can produce welfare gains close to the case of observable productivity.

Keywords: health insurance, Medicaid, labor supply, asset testing, general equilibrium, life-cycle models

JEL Classification: D52, D91, E21, H53, I13, I18

Suggested Citation

Pashchenko, Svetlana and Porapakkarm, Ponpoje, Work Incentives of Medicaid Beneficiaries and the Role of Asset Testing (July 7, 2016). Available at SSRN: https://ssrn.com/abstract=2323775 or http://dx.doi.org/10.2139/ssrn.2323775

Svetlana Pashchenko (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan
+818095248741 (Phone)

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