Unbiased Analysis of Today's Healthcare Issues

Does Public Insurance Crowd Out Private Insurance

Written By: Jason Shafrin - Mar• 12•06

Programs such as Medicaid and Medicare aim to expand health insurance to those currently uninsured.  These programs certainly accomplish this goal, but they also crowd out private insurance.  This means that an individual who has private health insurance may decide to use public insurance instead.  This would mean that society is simply substituting individual payment of insurance for government payment of insurance.

Culter, Gruber (1996) provide the seminal work on this subject.  They examine Medicaid expansions in the late 1980s and early 1990s.  During this period there were large increases in the Medicaid eligibility, specifically for pregnant women and children in (relatively) higher income families.  Cutler and Gruber find that an increase in Medicaid insurance coverage for 100 children will result in a decrease in private insurance for 31 of these children (31% crowdout); for adults, increasing coverage for 100 people will reduce the number of people with private insurance by about 49 individuals (49% crowdout).  One would guess that these effects are so large because they estimate the impact of Medicaid expansions, and thus many of these potential participants would have already had insurance.  Crowdout is presumably much lower for those at the lowest end of the income distribution.


Using the 1988-1993 March Current Population Survey (CPS), Gruber and Cutler aim to estimate the following equation:

  • COV=B_1*Elig + B_2*X + a_s*state + a_t*time+e
    • COV‘ is a dummy for Public, Private, or No insurance; ‘Elig is a dummy for eligibility; ‘X is a vector of demographic variables; ‘state and ‘time are dummy variables for specific states and years.

One problem, however is that ‘Elig‘ is an endogenous variable; people may choose how many hours to work in order to be able to participate in the Medicaid program.  In order to account for this, Cutler and Gruber use an instrumental variable approach.  The create a new variable ‘SimElig‘ by selecting a national random sample of 300 children of each age in each year and 3000 women of child-bearing age in each year.  They then assign the same sample to each state in that year and compute the average eligibility for the group in each state.  Thus, ‘SimElig‘ will vary only through differences in state legislation over time and not by the composition of Medicaid participants in each state.

Health Outcomes

One important question is whether or not having Medicaid insurance improves health outcomes.  While this article does not tackle this issue explicitly, it cites other studies that have.  Currie and Gruber (1995) find that Medicaid eligibility increases for children were associated with increases in medical care utilization and health improvements.  On the other hand, Piper, Ray and Griffin (1990) find no health benefits from Medicaid expansions in Tennessee, and Newhouse, et al. (1993) conclude that there is no significant health differences resulting from more or less generous insurance.

Policy Suggestions

Cutler and Gruber suggest the following policies:

  1. A sliding scale subsidy for the purchase of insurance.  People would receive a voucher for purchase of insurance which they could use either towards payment for private health insurance or they could simply use it towards a contribution towards a Medicaid program.  The subsidy would gradually decline as income increased.
  2. A waiting period could be imposed between when a person loses private insurance and when they become eligible for Medicaid.  This would discourage individuals from quickly switiching to free Medicaid insurance at the expense of private insurance.  Many states have recently adopted this approach, especially for the State Children’s Health Insurance Program (SCHIP)
  3. They do not support directly subsidizing hospitals or medical providers for the care of the poor or creating a national health insurance scheme.
Source: Cutler, David; Gruber; Jonathan (1996); “Does Public Insurance Crowd Out Private Insurance,” Quarterly Journal of Economics, Vol 111, No 2, pp. 391-430.

You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.