Public Health Insurance and Private Savings

Abstract

2We assess the effect of a means and asset-tested social insurance program, Medicaid, on the savings behavior of households. We do so using both data on asset holdings and on consumption, matched to information on the eligibility of families for health insurance coverage under this program. Exogenous variation in Medicaid eligibility is provided by the dramatic expansion of this program over the 1984 to 1993 period. We document that Medicaid eligibility has a sizeable and significant negative effect on wealth holdings, and we confirm this finding by showing a strong positive association between Medicaid eligibility and consumption expenditures. We also exploit the fact that asset testing was phased out by the Medicaid program over this period to document that these Medicaid effects are much stronger in the presence of an asset test. One of the most striking regularities about savings behavior in the U.S. is the skewed nature of wealth holdings; the median asset/income ratio for households headed by a 35 to 44 year old high school dropout is one-tenth that of households headed by a 35 to 44 year old college graduate. In a provocative recent article, Hubbard, Skinner, and Zeldes (1995) (hereafter, HSZ) suggest that one