Unbiased Analysis of Today's Healthcare Issues

Relaxing Medicaid income restrictions and nursing home use

Written By: Jason Shafrin - May• 25•07

The 2005 Deficit Reduction Act aimed to reduce Medicaid entitlements as one means to reduce the national deficit. One portion of the bill changed eligibility rules for the elderly to qualify for Medicaid payment of nursing home (NH) expenses. In the May edition of the Journal of Health Economics, authors David Grabowski and Jonathan Gruber estimate whether or not restricting (or expanding) Medicaid eligibility rules significantly impact NH utilization.

Who pays for nursing homes?

There are generally 4 institutions which pay for nursing home (NH) care.

  1. Medicare. Medicare pays 100% of the first 20 days of NH stays after a hospitalization, and a portion of NH costs between days 21-100 after a hospitalization.
  2. Long-term care (LTC) insurance. Private LTC insurance is purchased at younger ages and protects against the risk of needing NH care. LTC insurance is still fairly rare; only about 4% of NH expenditures are paid by private LTC insurance plans.
  3. Out of pocket payments.
  4. Medicaid. Medicaid will generally pay for NH care if the individual meets certain income and asset requirements. Generally, the individual needs to qualify for Supplemental Security Income (SSI) or be in a state which allows the individual to “spend down” income in order to qualify for Medicaid.


The authors seek to see how loosening Medicaid restrictions will impact NH usage. Expanding Medicaid income eligibility requirements, of course, will mechanically make more individuals eligible for Medicaid, but it may also make Medicaid more attractive since one does not need to “spend down” such a large portion of their assets or income. Loosening Medicaid restrictions can also affects supply. Higher Medicaid reimbursement rates will likely increase the percentage of patients who are Medicaid patients (vs. private insurance or out-of-pocket patients), but may also increase the total number of nursing home patients.


The analysis does have some complications. Certificate-of-need (CON) laws restrict the ability of NH supply to adjust to changes in NH demand. Also, the population affected by changes in eligibility are the middle class; poor individuals (always eligible) and rich individuals (never eligible) are not impacted by marginal changes in eligibility requirements. One also has to worry that Medicaid NH patients receive worse care than private insurance NH patients, but Grabowski et al. (NBER 2006) shows that this is not the case. Finally, the availability of care given by family or friends is not measured in this study and would likely impact NH utilization.

Data and Results

The data used is the National Long-Term Care Survey (NLTCS) from 1982, 1984, 1989, 1994 and 1999. The data have information on individual demographics, health, as well as income and asset levels to determine Medicaid eligibility. The econometric specification uses a probit regression with time, marriage, and state dummies included.

The authors generally find that loosening Medicaid eligibility rules has a limited impact on Medicaid NH usage. Further, the “spend down” rule that many states have adopted also does not significantly affect Medicaid NH utilization. The authors conclude: “we find consistent and clear evidence that nursing home utilization is inelastic with respect to state policies. Thus, the large increase in nursing home expenditures over the past few decades is not likely attributable to increased generosity in state Medicaid payment programs.

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