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Medicaid expansion is a tricky monetary issue, and there’s no free lunch

Peter Crabb
Peter Crabb

Idaho has garnered national attention on the issue of Medicaid expansion. A petition drive was successful and the question is likely to be put before voters in November.

While increasing the number of Idahoans under this government insurance program will undoubtedly help those who lack coverage now, the longer-term issue is whether or not their health improves and how much overall spending on health care changes. Economic theory tells us that more health insurance coverage increases the risk of poor health outcomes and raises the level of spending on health services.

A key principle of economics is that people respond to incentives. If more people have their health care services paid for by the government, these consumers have less incentive to take care of themselves and more incentive to consume health services.

This isn’t anything new. The health care insurance market has always had an incentive problem known as moral hazard. This adverse market condition occurs when the buyers of a particular product take greater risks because they have less incentive to be careful about their losses.

Moral hazard would not be much of a problem in insurance markets if the sellers could accurately measure and mitigate the risks their customers take. For example, after buying car insurance, people tend to drive more aggressively than they would if they were fully responsible for the costs of an accident. But you don’t see your insurance agent following you around to see whether you are driving safely.

Insurance companies take a number of actions to mitigate these risks, such as requiring high deductibles and reducing premiums if you agree to install a monitor on your car. But they can never monitor all their clients’ behavior, and the problem gets worse when it comes to your health.

Health insurance companies incur heavy costs to check client health and ensure good practices by doctors. To cover these substantial costs, private insurers charge higher rates. Medicaid covers all applicants no matter their health risks.

Medicaid expansion will also increase spending and raise prices for everyone.

In 2012 Gov. Butch Otter’s Medicaid Expansion Workgroup received a report from economists suggesting that by increasing the number of Medicaid recipients using federal funds Idaho would see an increase in state employment, increased productivity in the labor force, and cost savings in health care expenditures. The expected savings are to come from a supposed healthier workforce. However, the analysis ignores the moral hazard issue and the higher prices for everyone that result from a greater utilization of health care services.

The Center for Medicare and Medicaid Services projects that U.S. health spending will grow 1.0 percentage point faster than the overall economy each year over the next 10 years. Adding more people to the Medicaid roles will exacerbate the spending problem.

There is no free lunch in health care. Medicaid expansion might sound nice, but it is likely to do more economic harm than good.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. pcrabb@nnu.edu.

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