Because
before. The notch contributed to keep-
Behavioral Responses
ing families dependent on welfare and
eligibility
discouraged the movement of welfare
depends on
recipients into the workforce.17
Many of Medicaid's unseen costs result
income and
from the ways in which individuals and insti-
tutions respond to the existence of the pro-
Yelowitz observed that many beneficiaries
assets, many
gram and the benefits it offers.
would have to double their earnings before
beneficiaries
their additional work effort brought their
Recipients
total income back up to what it had been
become eligible
before they became ineligible for Medicaid.18
Medicaid's most crushing unseen costs
by avoiding
result from its discouraging private efforts to
Yelowitz found that this disincentive to
self-help--such as
alleviate poverty and to provide medical care
work affected the behavior of Medicaid recipi-
for actual and potential beneficiaries.
ents. He found that when income limits for
striving to earn
Anyone who meets federal eligibility criteria
Medicaid eligibility were raised in the late 1980s
more or save
(regarding age, income, family structure,
and early 1990s, enrollment in Aid for Families
more.
etc.), or a particular state's broadened criteria,
with Dependent Children fell. He posits that
is entitled to Medicaid benefits. This encour-
this response came from AFDC recipients who
ages many people to enroll even when they
previously could have found work and who no
could obtain care and coverage elsewhere.
longer would lose their Medicaid benefits if
Individuals sometimes respond to means-
they did so. He estimates that the change in
tested government programs by failing to take
Medicaid eligibility was responsible for a 6.3
percent decline in AFDC caseloads.19
steps they would otherwise take to alleviate
their own poverty. Because eligibility depends
Since 1996 the link between AFDC (now
on one's income and assets, many beneficia-
Temporary Assistance for Needy Families)
ries become or remain eligible by avoiding self-
benefits and Medicaid benefits has been bro-
help--such as striving to earn more or save
ken, and states have raised Medicaid income
more--that would make them ineligible. The
limits. Yelowitz observes, "As states have
prospect of losing Medicaid benefits can be a
expanded eligibility for Medicaid by increas-
significant deterrent for individuals who
ing the income limit to a higher level . . . the
notch has moved."20 The sharp reduction in
might otherwise enter the workforce or
increase their earnings. University of Kentucky
overall income that used to accompany
economist Aaron Yelowitz explains the effect
increases in earned income has been moder-
Medicaid has on the incentive to work:
ated by gradual reductions in Medicaid bene-
fits as earned income increases. Such mea-
Until 1987 the income eligibility limit
sures can lower the marginal "tax" rate that
(the maximum income allowable to
the loss of benefits imposes on additional
receive benefits) for Aid to Families with
earnings. However, they cannot eliminate it.
Dependent Children (AFDC) was effec-
Moreover, such benefit "phase-outs" lower
tively the same as the income limit for
that marginal tax rate by applying it to a
Medicaid. This meant that at a prede-
broader income range. As a result, Medicaid's
fined level of earnings, both AFDC and
disincentives to work, earn, and save have
Medicaid benefits were lost. Losing
moved up the income scale and now affect
Medicaid abruptly created a large and
more low-income individuals.
negative "notch" in income realized
Another form of self-help that Medicaid
from work, totaling several thousand
discourages is wealth accumulation. There are
dollars. Because of this notch problem,
two reasons this may happen. Eligible individ-
a welfare recipient who increased her
uals may reduce precautionary savings if they
earnings above the income limit would
know their medical expenses will be paid by
actually make her family worse off than
government. In addition, the value of an indi-
5