Madame Chairman, Distinguished Members of the Committee:
All anti-poverty efforts, whether public or private, run therisk of discouraging able beneficiaries from climbing the economicladder. In Missouri, government anti-poverty programs heavilydiscourage 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 healthof their intended beneficiaries.
As you weigh the options for increasing access to medical careamong Missouri's lowincome families, I urge you to avoid expandingMedicaid or similar programs. If anything, Missouri should furtherrestrict eligibility and benefits under these programs and demandthat Congress reform them the way it reformed cash assistance in1996.
Instead, Missouri should try freedom. Missouri should eliminatethe regulations that block free and open competition from insurersand providers licensed in other states. Removing theseprotectionist trade barriers lead to vigorous competition thatwould make health insurance and medical care affordable to anever-increasing number of low-income Missourians. AllowingMissouri's low-income families to trade freely with insurers andproviders licensed in other states will no doubt anger those in thehealth care industry who depend on such regulations to protect themfrom competition. Yet eliminating these regulations is essential toexpanding access to coverage and care, and would do so withouttrapping Missouri families in low-wage jobs.
Government Health Insurance Programs
Efforts to improve the health of low-income Americans typicallyfocus on expanding health insurance coverage through Medicaid andthe State Children's Health Insurance Program, or SCHIP. Theimpulse to resort to these programs is understandable, as theyoften give enrollees access to a wide range of medicalservices.
Medicaid and SCHIP are also attractive because every dollar thatMissouri legislators spend on Medicaid brings another $1.50 fromtaxpayers in other states via the federal government. Medicaid thusallows Missouri legislators to provide $2.50 of government benefitsfor every dollar taxes they collect. SCHIP is twice the bargainthat Medicaid is: Missouri legislators can effectively triple theirmoney by expanding SCHIP. Medicaid and SCHIP also have largeconstituencies within the health care industry. Insofar as Missourilegislators use fraudulent "provider taxes" to pull down additionalfederal funds, these programs become even more politicallylucrative.
At the same time, Medicaid and SCHIP come with significantdownsides. I discuss many of these problems in the Cato Institutepublications I have submitted to the committee. I will mention someof them here briefly:
- Medicaid and SCHIP subsidize many non-needyindividuals. The Urban Institute reports that one-fifth ofthose eligible for Medicaid nevertheless have private healthinsurance.1 A cottageindustry of Medicaid estate planners exists to help seniors spendMedicaid funds, rather than their own funds, on nursing homecare.2 Harvard economistGeorge Borjas found that after Congress cut non-citizen immigrantsfrom the Medicaid rolls in 1996, uninsurance in this groupfell because affected immigrants increased their workeffort and found jobs with health benefits.3 These factors suggest that Medicaid and SCHIPcurrently cover many who could obtain coverage without publicassistance.
- There is no evidence that Medicaid and SCHIP arecost-effective. According to economists Helen Levy of theUniversity of Michigan and David Meltzer of the University ofChicago, "It is clear that expanding health insurance is not theonly way to improve health... Policies could also be aimed atfactors that may fundamentally contribute to poor health, such aspoverty and low levels of education. There is no evidence at thistime that money aimed at improving health would be better spent onexpanding insurance coverage than on any of these otherpossibilities."4 In otherwords, the best way to improve health may be to improve educationor incomes, rather than expand government health programs.
- Medicaid and SCHIP make private options moreexpensive. For example, economists Fiona Scott Morton ofYale University and Mark Duggan of the University of Marylandestimate that Medicaid's price controls increase prescription drugprices for private payers by 15 percent.5
- Expanding government programs does nothing to addresssystemic quality problems. As a recent study in theNew England Journal of Medicine explains, "Expansion ofaccess to care through insurance coverage, which is the focus ofnational health care policy related to children, will not, byitself, eliminate the deficits in the quality ofcare."6
- America cannot keep turning to Medicaid andSCHIP. All states, Missouri in particular, are strugglingwith rising Medicaid outlays. After making conservative assumptionsabout future growth in Medicaid spending, my Cato Institutecolleague Jagadeesh Gokhale estimates that Medicaid will soonrequire implausibly large tax increases, such as a 78-percentincrease in lifetime federal non-payroll taxes for today'snewborns, and concomitant increases in state taxes.7
As I noted earlier, however, I wish to address one particularunintended 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 assistancethose with low incomes. Missouri's anti-poverty programs includeTemporary Assistance for Needy Families (or TANF, which providescash assistance); Food Stamps and WIC (nutrition assistance);housing subsidies; child care subsidies; Medicaid; and SCHIP.Low-income Missourians also receive cash transfers through thefederal Earned Income Tax Credit (EITC) and other refundable taxcredits.
To qualify for these programs, Missouri residents must haveearnings below specified thresholds. Therefore, as their earningsrise, residents become ineligible for these subsidies. Figure 1shows how welfare benefits fall in both Missouri and Kansas asearnings rise for a single mother of two. Likewise, as earningsrise, state residents also pay more in federal and state taxes.Figure 2 shows how that single mother's tax burden rises with herearnings in Missouri and Kansas.
When welfare recipients increase their earnings, then, theystand to lose thousands in government benefits and to payadditional thousands in taxes. In many instances, the value of theforgone benefits plus additional taxes can approach and even exceedthe value of the additional earnings. In other words, when welfarerecipients increase their work effort, they often fare worsefinancially. In those cases, government policy creates whateconomists call a "low-wage trap," because taxes and transferseliminate any financial incentive for low-wage individuals toincrease their earnings, effectively trapping many welfarerecipients in low-wage jobs.
Figure 3 illustrates how a single mother of two faces a low-wagetrap in both Missouri or Kansas.8 If she has no earnings, she receives over $20,000in public assistance. If she increases her earnings (or workeffort) from zero to a full-time minimum-wage job, herincome (net of taxes and welfare benefits) rises as well,due largely to the EITC. If she continues to increase her earningsbeyond minimum wage, however, her income no longer risesconcomitantly. Not only does she pay more in taxes, but she losesEITC, TANF, Food Stamps, WIC, and other welfare benefits. Considerthe case of a single mother of two who lives in Missouri and worksfull-time:
- If she earns $8 per hour and receives a $2-per-hour raise, herannual income would go down by more than $5,000.
- Her hourly wage could double to $16 per hour, and she wouldstill be more than $2,000 worse off. Just to break even, her hourlywage would have to rise above $18 per hour.
- In other words, if she earns $17,000 and could somehow increaseher earnings to $37,000, she would lose all of that $20,000 totaxes and forgone government benefits. (Economists would say shefaces a marginal effective tax rate of 100 percent.)
- If she earns $11,000, and somehow had an opportunity toincrease her earnings to $52,000, she would face an effective taxrate of 86 percent on that additional $41,000, whether she lives inMissouri or Kansas.
Some explanation is in order. I do not mean to suggest thatlow-income single mothers have many opportunities to increase theirearnings by $20,000 or $40,000. Rather, the point is thateven if they could increase their earnings by that much,they still would be little or no better off financially. Nor do Isuggest that beneficiaries look at such data and calculate exante exactly how much they can increase their earnings withoutlosing benefits; more likely, they would learn by observing theirown and others' experiences. Finally, these figures are based onaverage benefits and tax burdens for single mothers who takeadvantage of all available programs; disincentives to earn willvary with the actual value of benefits received.
Nevertheless, Medicaid, SCHIP, and similar programs create alow-wage trap that often eliminates any financial incentive forbeneficiaries to climb the economic ladder.
Moreover, low-wage traps are endemic to government anti-povertyprograms. You cannot eliminate them by gradually phasing outbenefits or administering benefits through the private sector, andyou can mitigate them only by making government aid less attractiveor cutting eligibility. Expanding eligibility pulls more peopleinto a low-wage trap, while enhancing benefits makes the trapdeeper. There are only two ways to eliminate low-wage trapscompletely. The first is to eliminate all government aid to thepoor and allow voluntary charity to identify and withholdassistance from those who can provide for themselves. The second isto open such programs to everyone, thereby socializing entiresectors of the economy (which would create its own, much greaterchallenges).
Medicaid and SCHIP are often the most valuable governmentbenefit available to lowincome families, and are the last benefitsto disappear as a family's earnings rise. They therefore contributeto both the breadth and the depth of Missouri's low-wage trap. In2003, a single mother earning nearly $50,000 ($24 per hour,full-time) could still enroll a child in SCHIP. If she increasedher earnings by $4,000, however, her income would fall.
Figure 4 illustrates what would happen if Missouri were toexpand Medicaid, for example, to more parents. The left-mostportion of the dashed red line shows that the incomes of newlyeligible adults would rise. However, those added benefits and thehigher taxes required to finance them (shown by the right-most partof the dashed red line) would make the low-wage trap broader anddeeper, giving eligible adults less reason to increase theirearnings. Likewise, any Medicaid or SCHIP expansion would pull moreresidents into Missouri's low-wage trap, as well as make that trapdeeper for those already in it.
A More Compassionate Approach
Rather than further discourage Missouri's poor from climbing theeconomic ladder, this committee should explore reforms that usemarket competition to bring health insurance and medical carewithin reach of low-income families.
For example, the non-partisan Congressional Budget Officeestimates that state regulations increase the cost of privatehealth insurance by as much as 15 percent.9 Missouri requires consumers to purchase 39 typesof health insurance coverage whether they want them or not, such ascoverage for chiropractors, podiatrists, maternity, and hairpieces.Missouri requires teetotalers to buy coverage for alcoholismtreatment and requires devout Catholics to buy coverage forcontraceptives. Price controls also increase the cost of coveragefor many workers in the small-group market. Consumers have littleability to escape such unwanted regulatory costs because Missouriforbids residents to purchase policies licensed in other stateswith more consumer-friendly regulations. As a result, healthinsurance in Missouri is less affordable for everyone, particularlylow-income families.
Similarly, state regulations prevent providers licensed in otherstates from practicing in Missouri. For example, 47 states grantnurse practitioners greater flexibility to treat patients andgreater prescribing authority. Preventing those and other licensedprofessionals from practicing in Missouri unnecessarily increasesthe cost of routine and even more sophisticated medical care.Again, such regulations place the greatest burden on low-incomepatients.
Missouri can make both coverage and care more affordable forlow-income residents by allowing insurers and providers licensed inthe other 49 states to do business in the Show-Me State. Forexample, the legislature could enact a constitutional amendmentthat states:
No law shall interfere with a person's ability toobtain medical services or insurance from suppliers licensed by anyof the United States, according to the scope of that license. Anysuch licensee will be subject to suit, in respect of anytransaction covered by this amendment, as if the licensee werelicensed locally.
While still protecting consumers, such an amendment would bringhealth care and coverage within the reach of more low-incomeMissourians - not by expanding government subsidies, but byreducing its price. Market competition can thus increase thepoor's access to medical care without pulling them into a low-wagetrap that could have detrimental effects on their health. Quite thecontrary, by enabling the poor to spend less money on coverage andcare, market competition could help pull them out of poverty.
As a libertarian, I want to live in a society that does not denypeople medical care simply because they are unable to pay. By thesame token, a humane society does not discourage the poor fromreaching their full potential. Helping the poor therefore requiresstriking a delicate balance between too little assistance and toomuch assistance. The available evidence suggests that Medicaid andSCHIP err in the direction of providing too much assistance, andthat expanding these programs would be dangerous andunsustainable.
I urge and hope that you will instead try freedom, and allowmarket competition to make health insurance and medical care moreaffordable to Missouri's poor. Such efforts are sure to meetresistance from special interests who rely on regulation to protectthem from competition. I hope that when given a choice, you willnot hesitate to side with the poor over the special interests.
I thank you for this opportunity to share my thoughts onproviding medical care to Missouri's poor.
1 Amy J. Davidoff, BowenGarrett, and Alshadye Yemane, "Medicaid-Eligible Adults Who Are NotEnrolled: Who Are They and Do They Get the Care They Need?" UrbanInstitute Policy Brief, series A, no. A-48, October 1, 2001; andAmy J. Davidoff, Bowen Garrett, and Matthew Schirmer, "ChildrenEligible for Medicaid but Not Enrolled: How Great a PolicyConcern?" Urban Institute Policy Brief, series A, no. A-41,September 1, 2000.
2 See Stephen A. Moses,"Aging America's Achilles' Heel: Medicaid Long-Term Care," CatoInstitute Policy Analysis no. 549, Sept ember 1, 2005.
3 George J. Borjas,"Welfare Reform, Labor Supply, and Health Insurance in theImmigrant Population," Journal of Health Economics 22, no.6 (November 2003): 956-57.
4 Helen Levy and DavidMeltzer, "What Do We Really Know About Whether Health InsuranceAffects Health?" in Health Policy and the Uninsured, ed. CatherineMcLaughlin (Washington: Urban Institute Press, 2004), p. 201.
5 Mark Duggan and FionaScott Morton, "The Distortionary Effects of Government Procurement:Evidence from Medicaid Prescription Drug Purchasing," QuarterlyJournal of Economics 121, no. 1 (2006).
6 Rita Mangione-Smith, etal., "The Quality of Ambulatory Care Delivered to Children in theUnited States," New England Journal of Medicine 357, no 15(October 11, 2007): 1515-1523.
7 Jagadeesh Gokhale,"Medicaid's Soaring Cost: Time to Step on the Brakes," CatoInstitute Policy Analysis no. 597, July 19, 2007.
8 Data are for 2003, themost recent year available. Subsequent changes to means-testedprograms in Missouri or Kansas may alter the breadth and depth ofthose states' low-wage traps.
9 U.S. CongressionalBudget Office, "Increasing Small-Firm Health Insurance Coveragethrough Association Health Plans and HealthMarts," January 2000,pp. 16-17, http://www.cbo.gov/ftpdocs/18xx/doc1815/healthins.pdf.See also William J. Congdon, Amanda Kowalski, and Mark H.Showalter, "State Health Insurance Regulations and the Price ofHigh-Deductible Policies," working paper, January 15, 2005.