All anti‐poverty efforts, whether public or private, run the risk of discouraging able beneficiaries from climbing the economic ladder. In Missouri, government anti‐poverty programs heavily discourage low‐income families — in particular, single mothers — from investing in education or otherwise increasing their earnings. Since both education and income affect health, the “low‐wage trap” created by those programs may even detrimentally affect the health of their intended beneficiaries.
As you weigh the options for increasing access to medical care among Missouri’s lowincome families, I urge you to avoid expanding Medicaid or similar programs. If anything, Missouri should further restrict eligibility and benefits under these programs and demand that Congress reform them the way it reformed cash assistance in 1996.
Instead, Missouri should try freedom. Missouri should eliminate the regulations that block free and open competition from insurers and providers licensed in other states. Removing these protectionist trade barriers lead to vigorous competition that would make health insurance and medical care affordable to an ever‐increasing number of low‐income Missourians. Allowing Missouri’s low‐income families to trade freely with insurers and providers licensed in other states will no doubt anger those in the health care industry who depend on such regulations to protect them from competition. Yet eliminating these regulations is essential to expanding access to coverage and care, and would do so without trapping Missouri families in low‐wage jobs.
Government Health Insurance Programs
Efforts to improve the health of low‐income Americans typically focus on expanding health insurance coverage through Medicaid and the State Children’s Health Insurance Program, or SCHIP. The impulse to resort to these programs is understandable, as they often give enrollees access to a wide range of medical services.
Medicaid and SCHIP are also attractive because every dollar that Missouri legislators spend on Medicaid brings another $1.50 from taxpayers in other states via the federal government. Medicaid thus allows Missouri legislators to provide $2.50 of government benefits for every dollar taxes they collect. SCHIP is twice the bargain that Medicaid is: Missouri legislators can effectively triple their money by expanding SCHIP. Medicaid and SCHIP also have large constituencies within the health care industry. Insofar as Missouri legislators use fraudulent “provider taxes” to pull down additional federal funds, these programs become even more politically lucrative.
At the same time, Medicaid and SCHIP come with significant downsides. I discuss many of these problems in the Cato Institute publications I have submitted to the committee. I will mention some of them here briefly:
- Medicaid and SCHIP subsidize many non‐needy individuals. The Urban Institute reports that one‐fifth of those eligible for Medicaid nevertheless have private health insurance.1 A cottage industry of Medicaid estate planners exists to help seniors spend Medicaid funds, rather than their own funds, on nursing home care.2 Harvard economist George Borjas found that after Congress cut non‐citizen immigrants from the Medicaid rolls in 1996, uninsurance in this group fell because affected immigrants increased their work effort and found jobs with health benefits.3 These factors suggest that Medicaid and SCHIP currently cover many who could obtain coverage without public assistance.
- There is no evidence that Medicaid and SCHIP are cost‐effective. According to economists Helen Levy of the University of Michigan and David Meltzer of the University of Chicago, “It is clear that expanding health insurance is not the only way to improve health… Policies could also be aimed at factors that may fundamentally contribute to poor health, such as poverty and low levels of education. There is no evidence at this time that money aimed at improving health would be better spent on expanding insurance coverage than on any of these other possibilities.“4 In other words, the best way to improve health may be to improve education or incomes, rather than expand government health programs.
- Medicaid and SCHIP make private options more expensive. For example, economists Fiona Scott Morton of Yale University and Mark Duggan of the University of Maryland estimate that Medicaid’s price controls increase prescription drug prices for private payers by 15 percent.5
- Expanding government programs does nothing to address systemic quality problems. As a recent study in the New England Journal of Medicine explains, “Expansion of access to care through insurance coverage, which is the focus of national health care policy related to children, will not, by itself, eliminate the deficits in the quality of care.“6
- America cannot keep turning to Medicaid and SCHIP. All states, Missouri in particular, are struggling with rising Medicaid outlays. After making conservative assumptions about future growth in Medicaid spending, my Cato Institute colleague Jagadeesh Gokhale estimates that Medicaid will soon require implausibly large tax increases, such as a 78‐percent increase in lifetime federal non‐payroll taxes for today’s newborns, and concomitant increases in state taxes.7
As I noted earlier, however, I wish to address one particular unintended and underappreciated consequence of Medicaid and SCHIP: their contribution to Missouri’s low‐wage trap.
Missouri’s Low‐Wage Trap
Like other states, Missouri offers various forms of assistance those with low incomes. Missouri’s anti‐poverty programs include Temporary Assistance for Needy Families (or TANF, which provides cash assistance); Food Stamps and WIC (nutrition assistance); housing subsidies; child care subsidies; Medicaid; and SCHIP. Low‐income Missourians also receive cash transfers through the federal Earned Income Tax Credit (EITC) and other refundable tax credits.
To qualify for these programs, Missouri residents must have earnings below specified thresholds. Therefore, as their earnings rise, residents become ineligible for these subsidies. Figure 1 shows how welfare benefits fall in both Missouri and Kansas as earnings rise for a single mother of two. Likewise, as earnings rise, state residents also pay more in federal and state taxes. Figure 2 shows how that single mother’s tax burden rises with her earnings in Missouri and Kansas.
When welfare recipients increase their earnings, then, they stand to lose thousands in government benefits and to pay additional thousands in taxes. In many instances, the value of the forgone benefits plus additional taxes can approach and even exceed the value of the additional earnings. In other words, when welfare recipients increase their work effort, they often fare worse financially. In those cases, government policy creates what economists call a “low‐wage trap,” because taxes and transfers eliminate any financial incentive for low‐wage individuals to increase their earnings, effectively trapping many welfare recipients in low‐wage jobs.
Figure 3 illustrates how a single mother of two faces a low‐wage trap in both Missouri or Kansas.8 If she has no earnings, she receives over $20,000 in public assistance. If she increases her earnings (or work effort) from zero to a full‐time minimum‐wage job, her income (net of taxes and welfare benefits) rises as well, due largely to the EITC. If she continues to increase her earnings beyond minimum wage, however, her income no longer rises concomitantly. Not only does she pay more in taxes, but she loses EITC, TANF, Food Stamps, WIC, and other welfare benefits. Consider the case of a single mother of two who lives in Missouri and works full‐time:
- If she earns $8 per hour and receives a $2‑per‐hour raise, her annual income would go down by more than $5,000.
- Her hourly wage could double to $16 per hour, and she would still be more than $2,000 worse off. Just to break even, her hourly wage would have to rise above $18 per hour.
- In other words, if she earns $17,000 and could somehow increase her earnings to $37,000, she would lose all of that $20,000 to taxes and forgone government benefits. (Economists would say she faces a marginal effective tax rate of 100 percent.)
- If she earns $11,000, and somehow had an opportunity to increase her earnings to $52,000, she would face an effective tax rate of 86 percent on that additional $41,000, whether she lives in Missouri or Kansas.
Some explanation is in order. I do not mean to suggest that low‐income single mothers have many opportunities to increase their earnings by $20,000 or $40,000. Rather, the point is that even if they could increase their earnings by that much, they still would be little or no better off financially. Nor do I suggest that beneficiaries look at such data and calculate ex ante exactly how much they can increase their earnings without losing benefits; more likely, they would learn by observing their own and others’ experiences. Finally, these figures are based on average benefits and tax burdens for single mothers who take advantage of all available programs; disincentives to earn will vary with the actual value of benefits received.
Nevertheless, Medicaid, SCHIP, and similar programs create a low‐wage trap that often eliminates any financial incentive for beneficiaries to climb the economic ladder.
Moreover, low‐wage traps are endemic to government anti‐poverty programs. You cannot eliminate them by gradually phasing out benefits or administering benefits through the private sector, and you can mitigate them only by making government aid less attractive or cutting eligibility. Expanding eligibility pulls more people into a low‐wage trap, while enhancing benefits makes the trap deeper. There are only two ways to eliminate low‐wage traps completely. The first is to eliminate all government aid to the poor and allow voluntary charity to identify and withhold assistance from those who can provide for themselves. The second is to open such programs to everyone, thereby socializing entire sectors of the economy (which would create its own, much greater challenges).
Medicaid and SCHIP are often the most valuable government benefit available to lowincome families, and are the last benefits to disappear as a family’s earnings rise. They therefore contribute to both the breadth and the depth of Missouri’s low‐wage trap. In 2003, a single mother earning nearly $50,000 ($24 per hour, full‐time) could still enroll a child in SCHIP. If she increased her earnings by $4,000, however, her income would fall.
Figure 4 illustrates what would happen if Missouri were to expand Medicaid, for example, to more parents. The left‐most portion of the dashed red line shows that the incomes of newly eligible adults would rise. However, those added benefits and the higher taxes required to finance them (shown by the right‐most part of the dashed red line) would make the low‐wage trap broader and deeper, giving eligible adults less reason to increase their earnings. Likewise, any Medicaid or SCHIP expansion would pull more residents into Missouri’s low‐wage trap, as well as make that trap deeper for those already in it.
A More Compassionate Approach
Rather than further discourage Missouri’s poor from climbing the economic ladder, this committee should explore reforms that use market competition to bring health insurance and medical care within reach of low‐income families.
For example, the non‐partisan Congressional Budget Office estimates that state regulations increase the cost of private health insurance by as much as 15 percent.9 Missouri requires consumers to purchase 39 types of health insurance coverage whether they want them or not, such as coverage for chiropractors, podiatrists, maternity, and hairpieces. Missouri requires teetotalers to buy coverage for alcoholism treatment and requires devout Catholics to buy coverage for contraceptives. Price controls also increase the cost of coverage for many workers in the small‐group market. Consumers have little ability to escape such unwanted regulatory costs because Missouri forbids residents to purchase policies licensed in other states with more consumer‐friendly regulations. As a result, health insurance in Missouri is less affordable for everyone, particularly low‐income families.
Similarly, state regulations prevent providers licensed in other states from practicing in Missouri. For example, 47 states grant nurse practitioners greater flexibility to treat patients and greater prescribing authority. Preventing those and other licensed professionals from practicing in Missouri unnecessarily increases the cost of routine and even more sophisticated medical care. Again, such regulations place the greatest burden on low‐income patients.
Missouri can make both coverage and care more affordable for low‐income residents by allowing insurers and providers licensed in the other 49 states to do business in the Show‐Me State. For example, the legislature could enact a constitutional amendment that states:
