Federal Subsidization and Optimal State Medicaid Provision

This paper quantifies the effect of federal subsidies on state Medicaid provision in the United States. The U.S. federal government matches each state at least one dollar for each dollar that the state spends on Medicaid. This subsidy creates an incentive for states to provide a more generous Medicaid program. We measure the effect of the subsidy by constructing a multi- regional, heterogeneous-agent, dynamic general equilibrium model with incomplete insurance markets and calibrating it to the U.S. economy. In the model, state governments take the federal subsidy as given and choose the Medicaid policy that maximizes the welfare of its citizens. We compare the results of the benchmark model to an economy with the subsidy removed and find that states rely almost entirely on the federal subsidy to finance their Medicaid programs.