Do Amy Finkelstein and colleagues show that Medicaid has little value?

The Value of Medicaid: Interpreting Results from the Oregon Health Insurance Experiment

By Amy Finkelstein, Nathaniel Hendren & Erzo F.P. Luttmer
National Bureau of Economic Research, Working Paper 21308, June 2015


We develop a set of frameworks for valuing Medicaid and apply them to welfare analysis of the Oregon Health Insurance Experiment, a Medicaid expansion for low-income, uninsured adults that occurred via random assignment. Our baseline estimates of Medicaid's welfare benefit to recipients per dollar of government spending range from about $0.2 to $0.4, depending on the framework, with at least two-fifths – and as much as four-fifths – of the value of Medicaid coming from a transfer component, as opposed to its ability to move resources across states of the world. In addition, we estimate that Medicaid generates a substantial transfer, of about $0.6 per dollar of government spending, to the providers of implicit insurance for the low-income uninsured. The economic incidence of these transfers is critical for assessing the social value of providing Medicaid to low-income adults relative to alternative redistributive policies.


Valuing Medicaid

By Harold Pollack, Bill Gardner & Timothy Jost
The American Prospect, July 26, 2015

How Valuable Is Medicaid?

An important recent paper by Amy Finkelstein, Nathaniel Hendren, and Erzo Luttmer, “The Value of Medicaid,” tries to determine how much it is worth, but in a narrow way whose baseline assumptions understate the value of the program. The authors use data from the Oregon Health Insurance Experiment. The experiment worked like this: Oregon had more poor and uninsured people than they could insure under Medicaid. So they held a lottery for who could apply for Medicaid coverage. Finkelstein and her colleagues realized that this lottery was in effect an experiment that would allow them to study the impact of Medicaid coverage on the previously uninsured.  Following a reasonable — but contestable — economic methodology, Finkelstein and colleagues estimated an equivalent dollar-value to the improved health observed among lottery winners. The authors then explored what happened to a dollar that was spent on providing Medicaid: Who actually benefited and by how much? And would recipients have been willing to pay for their Medicaid benefits if they had to?

The study’s major findings, widely reported in The Wall Street Journal, Vox, Forbes, and many other media outlets, can be summarized as follows:

  1. Uninsured people who get Medicaid only gained from 20 to 40 cents in value from each dollar spent by the government.
  2. A principal reason why the benefit of getting insured was so small is that when uninsured people received care, they typically paid only 20 cents on the dollar for those services. Safety-net providers, state or local government, friends, relatives, or someone else absorbed the remaining costs. When a recipient became insured, Medicaid paid some of these costs at the rate of about 60 cents per dollar.
  3. Because a large fraction of Medicaid expenditures financed care that recipients would have received anyway (for example, by leaving bad debt at hospitals), it is unclear whether recipients themselves would have been willing to pay the full costs of Medicaid.

While the Oregon Health Insurance Experiment was a well-designed study, too few of the study participants experienced serious medical conditions to investigate how Medicaid affected their health or quality of life. In addition, the experiment — and thus Finkelstein, Hendren, and Luttmer’s study — did not examine how Medicaid affected recipients’ families or the health-care institutions that care for low-income uninsured patients. Medicaid’s long-term benefits as an investment in infants and children were also beyond the scope of the Oregon experiment.

But perhaps the most important limitation of the study stems from an assumption that many readers would be unlikely to notice. Finkelstein and her colleagues placed a very low value — $25,000 — on a year of additional life for Medicaid beneficiaries. The typical threshold used in health services research is much larger, in recent studies far above $100,000 per additional year of (healthy) life. Yet because the median income of the Oregon study participants was about one-fourth of the median income in the United States, the researchers chose to value an additional life-year at about one-fourth of the usual threshold. This assumption powerfully frames everything that follows in this analysis. After all, if you start out by assuming that Medicaid beneficiaries’ lives are worth very little, you will find that it is not worth spending much money to prolong them.

Although Finkelstein, Hendren, and Luttmer’s baseline assumptions are methodologically defensible, they have radical implications that are rarely so bluntly applied in other domains of health-policy research. Choices about how to financially value the health of poor people relative to the health of others are inevitably both politically and morally freighted. It strains credulity, for example, to imagine American policymakers using this low a value for life when analyzing mammography, prostate cancer treatment, or implantable cardiac defibrillators for seniors.

The authors are careful not to make any normative statements based on these findings, but others such as Michael Cannon, Tyler Cowen, and John Graham have done so. They make two arguments: First, Medicaid is an inefficient way to benefit the poor. If a Medicaid dollar results in only 20 cents in benefit to a previously uninsured person, wouldn’t it be more efficient to simply give that person a dollar? And, second, Medicaid is actually a subsidy for people other than those it ostensibly helps.

We see matters rather differently. Economists have long understood that poor people would prefer cash to subsidized health insurance (especially if they can still get health care for free). So why does every developed country, including the United States, subsidize health insurance for the poor? Part of the reason is that those countries have broader moral and public-health criteria for thinking about health insurance and poor people’s lives. Universal health care expresses a commitment to the well-being of fellow citizens. Everyone should have access to a decent minimum of care; caring for others in distress is a primary expression of human solidarity.


Quotes from conservatives cited above:

Michael Cannon: “The (Finkelstein et al) trio found that Medicaid enrollees receive very little benefit from each dollar spent on Medicaid.”

Tyler Cowan:  “An implication of this is that the poor would be better off getting direct cash transfers.”

John Graham:  “Only 20 to 40 cents of Medicaid spending actually goes towards patients’ welfare.” 



By Don McCanne, MD

This NBER study by Amy Finkelstein and her colleagues on the value of Medicaid is important in that it is being used by conservatives to discredit Medicaid, giving fodder to opponents of this program. For that reason, it is important to understand the limitations of the narrow assumptions used in the study, and that is why the article by Harold Pollack and his colleagues is so important.

The Finkelstein article is challenging for the non-economist, but one assumption stands out as a basis for countering the claims of the conservatives who would use this to diminish support for Medicaid. That assumption in this study is that a year of life is worth about $25,000 for Medicaid beneficiaries when most studies assign a value closer to $125,000 per quality-adjusted life year ($100,000 to $150,000). When private insurance extends life by a year it is worth about five times what that same year of life would be worth for a low-income Medicaid beneficiary, so this study seems to assume. According to Pollack, et al., “… if you start out by assuming that Medicaid beneficiaries’ lives are worth very little, you will find that it is not worth spending much money to prolong them.”

Another bizarre line of reasoning is that much of the Medicaid money does not benefit the patient because it goes to physicians, hospitals, and Medicaid managed care organizations. The assumption seems to be that if the patient was not covered by Medicaid, the care would be provided anyway on a charity basis. Thus the patient does not receive any benefit from Medicaid because charity care and care under Medicaid are supposedly the same (not true), whereas the physicians and hospitals would benefit by receiving Medicaid income for what would otherwise be charity care. Would these conservatives seriously contend that private insurance provides little value for patients since the money goes to the physicians, hospitals and insurers and not to the patient? Of course not. Private insurance funds are used to purchase health care, providing considerable value for the patient. So how can they say that Medicaid funds are simply diverted to the health care delivery system, providing little value for the patient?

This is yet one more study to come out of the Oregon Health Insurance Experiment. The raw data in these studies are valid but the assumptions made and the interpretations extrapolated from them are being used to make claims such as, "Medicaid enrollees receive very little benefit from each dollar spent on Medicaid." Medicaid saves lives, reduces suffering, and prevents financial hardship. That has real value.