Commentary

Medicaid a Low-Wage Trap

Health care costs keep rising, and New Mexico is having a harder time than most states. According to the Census Bureau, one out of every five residents lacks health insurance. That gives New Mexico the dubious honor of having the second highest share of uninsured residents next to Texas.

Lawmakers in Washington, D.C., and the states have struggled for years to make health care more affordable. New Mexico Gov. Bill Richardson is actively trying to expand health insurance coverage.

Unfortunately, the governor’s strategy for expanding coverage would discourage workers from working harder or taking better-paying jobs, would make health care less affordable, and would do little to improve health overall.

The centerpiece of Richardson’s plan is an expansion of Medicaid, which provides coverage to low-income families. Like other government anti-poverty programs, Medicaid was created to bring the necessities of life to those who cannot provide for themselves.

All such programs, however, have a troubling feature. They create what scholars call a low-wage trap that discourages families from trying to move up the income ladder.

For instance, suppose a single mother of two small children in New Mexico has an opportunity to increase her annual earnings from $25,000 to $29,000. According to the federal government, the additional taxes and the gradual loss of government aid would cause her income to go up by only $200. If she increased her earnings to $31,000, her income would actually go down by $2,700.

Richardson’s proposal would subject half of the state’s families to this type of disincentive to work. Median income for a family of four in New Mexico is $48,000. Yet the governor wants to make families of four earning up to $60,000 eligible for Medicaid— a program for the poor.

That same Medicaid proposal would also make private health care less accessible for families who do escape the low-wage trap. New Mexico’s Medicaid program already purchases health care for 19 percent of residents. (The average state covers 14 percent of residents.) Government can’t buy that much of something without damaging the market, and Medicaid is no exception.

Studies have shown that Medicaid increases prices for private payers and reduces private insurance coverage. One study found that Medicaid actually increases the price of prescription drugs for private purchasers by 13 percent.

Finally, and paradoxically, when states expand Medicaid enrollment, it seems to do little to improve health. One reason might be that many new Medicaid enrollees previously had private coverage anyway. Also, many who previously had private coverage lose it and become uninsured. A book by the left-leaning Urban Institute summarized the research on such expansions: “There is no evidence at this time that money aimed at improving health would be better spent on expanding insurance coverage than on … other possibilities.”

Fortunately, there is a way to make health care more affordable for the uninsured, without creating perverse incentives or wasteful expenditures. The key is to use consumer choice and competition to make health care more affordable.

Take health insurance. New Mexico currently requires residents who purchase health insurance to purchase 45 specific types of coverage— whether they want it or not. Requiring residents to purchase coverage for in-vitro fertilization, for example, makes health insurance less affordable for those who don’t want it (e.g., practicing Catholics).

Gov. Richardson could increase coverage among low-income families by letting them purchase policies from out-of-state, where officials don’t impose so many unwanted regulatory costs.

Or take basic care. Convenience clinics are popping up in retail stores around the nation. These clinics are staffed by nurse practitioners and make basic care convenient and affordable for low-income families.

New Mexico is friendlier than most states toward these clinics— but not always to the stores that house them. Santa Fe nearly blocked a new Wal-Mart, which would have denied low-income families an affordable pharmacy and possibly a low-cost clinic. Removing barriers to competition in the retail sector generally can make prescriptions and basic care more affordable as well.

Those common-sense steps would put health care within the reach of more New Mexicans. Rather than snare its residents in a low-wage trap, New Mexico can lift them up by using choice and competition to make health care more affordable.

Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It (2005).