Exits, recidivism, and caseload growth: The effect of private health insurance markets on the demand for Medicaid

This study investigates the effects of local labor market conditions and the availability of employer-sponsored health insurance on exits from Medicaid, re-entry into Medicaid, and overall caseload growth. Data for this project come from a unique administrative database containing a 10-percent sample of all cases on California's Medicaid program in 1987 and a 10-percent sample of all new cases starting each year between 1987 and 1995. Exit and recidivism rates are estimated using discrete duration models where the monthly exit or re-entry probability is a function of demographic characteristics, local labor market variables, the probability of having employer-sponsored insurance in a given county, and fixed time and county effects. Caseload growth models are estimated using Feasible Generalized Least Squares (FGLS) where growth is a function of changes in county unemployment rates, average quarterly earnings, employer-based health insurance rates, and population size.; I find that improvements in labor market opportunities promote exits off the Medicaid program and deter recidivism. A 2.5 percentage point increase in the availability of employer-sponsored insurance leads to an 8.4 percent increase in the probability that a completed Medicaid spell lasts no more than 2 years and a 4.2 decrease in the probability of re-entry into Medicaid within 2 years after leaving. A 3.7 percentage point reduction in unemployment rates would generate a 12.6 percent increase in the probability of leaving Medicaid within two years and a 4.5 percent reduction in the two-year recidivism rate. Finally, a 10 percent increase in earnings generates a 6 percent increase in the two-year exit rate. The effects of earnings on recidivism, however, are inconclusive.; These findings suggest that Medicaid expenditures and caseloads will be sensitive to economic fluctuations and secular trends in the availability of health insurance. Indeed, an analysis of Medicaid recipients on Aid to Families with Dependent Children shows that in response to typical economic fluctuations over the business cycle (from peak to trough), caseloads for single-parent families would increase 4 percent and caseloads for two-parent families would increase 10 percent in California. As a result, the cost of welfare in California would increase {dollar}342 million and the cost of Medicaid for welfare-related cases would increase {dollar}143 million as California moved from a period of economic expansion to a period of economic contraction.