Labor Supply Incentives of Medicaid

The employment rate among Medicaid beneficiaries is much lower than the employment rate among the rest of the population. To what extent this difference is due to the incentives created by Medicaid? We use general equilibrium heterogeneous agents model to evaluate labor supply distortions created by Medicaid eligibility rules and quantify its welfare effects. Using Medical Expenditure Panel Survey Dataset we calibrate the model to replicate the life-cycle patterns of employment and insurance take-up behavior as well as the key aggregate statistics for the US. We use the model to estimate potential labor income of people whom we do not observe working in the data. We find that around 23% of Medicaid enrollees will lose their eligibility if they start working. More than half of these people will choose to work if they are able to keep public insurance. These distortions are costly for the economy: if Medicaid eligibility could be linked to (unobservable) exogenous productivity the resulting ex-ante welfare gains are equivalent to 1% of the annual consumption. We explore several policy reforms and show that the best outcome is achieved if only workers can enroll in Medicaid through the categorical eligibility channel while non-workers enroll through the Medically Needy channel.