Medicaid and Household Savings Behavior: New Evidence from Tax Refunds

80 Pages Posted: 15 Mar 2019 Last revised: 24 May 2019

See all articles by Emily Gallagher

Emily Gallagher

University of Colorado at Boulder - Department of Finance; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Michal Grinstein-Weiss

University of North Carolina (UNC) at Chapel Hill; Washington University in St. Louis

Jorge Sabat

Universidad Diego Portales

Date Written: March 11, 2019

Abstract

Using data on over 57,000 low-income tax filers, we estimate the effect of Medicaid access on the propensity of households to save or repay debt from their tax refunds. We instrument for Medicaid access using variation in state eligibility rules. We find substantial heterogeneity across households in the savings response to Medicaid. Households that are not experiencing financial hardship behave in a manner consistent with a precautionary savings model, meaning they save less under Medicaid. In contrast, among households experiencing financial hardship, Medicaid eligibility increases refund savings rates by roughly 5 percentage points or $102. For both sets of households, effects are stronger in states with lower bankruptcy exemption limits – consistent with uninsured, financially constrained households using bankruptcy to manage health expenditure risk. Our results imply that expansions to the social safety net may affect the magnitude of the consumption response to tax rebates.

Keywords: Health Insurance, ACA, Precautionary Savings, Strategic Default, Bankruptcy, Simulated Instruments

JEL Classification: D11, D14, H51, I13

Suggested Citation

Gallagher, Emily and Gopalan, Radhakrishnan and Grinstein-Weiss, Michal and Sabat, Jorge, Medicaid and Household Savings Behavior: New Evidence from Tax Refunds (March 11, 2019). Journal of Financial Economics (JFE), Forthcoming; 9th Miami Behavioral Finance Conference 2018. Available at SSRN: https://ssrn.com/abstract=3052026 or http://dx.doi.org/10.2139/ssrn.3052026

Emily Gallagher

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Michal Grinstein-Weiss

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Jorge Sabat (Contact Author)

Universidad Diego Portales ( email )

Av. Santa Clara 797
Santiago, Región Metropolitana
Chile

HOME PAGE: http://https://sites.google.com/site/jorgesabat/home

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