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Table

State SSI supplements (in 2010 dollars) for aged individuals
living independently  (selected -years, 1975-2009)

State              1975   1980   1985   1990   1996   2002   2009

Alaska              XXX    XXX    XXX    XXX    XXX    XXX    XXX
California          XXX    XXX    XXX    XXX    XXX    XXX    XXX
Colorado            XXX    XXX    XXX     XX     XX     XX     XX
Connecticut           X    XXX    XXX    XXX      X    XXX    XXX
District of           X     XX     XX     XX      X      X    XXX
 Columbia
Hawaii               XX     XX     XX      X      X      X    XXX
Idaho               XXX    XXX    XXX    XXX     XX     XX     XX
Illinois (a)         NA     NA     NA     NA     NA     NA     NA
Maine                XX     XX     XX     XX     XX     XX    XXX
Massachusetts       XXX    XXX    XXX    XXX    XXX    XXX    XXX
Michigan             XX     XX     XX     XX     XX     XX    XXX
Minnesota           XXX     XX     XX    XXX    XXX     XX    XXX
Nebraska            XXX    XXX    XXX     XX     XX     XX    XXX
Nevada              XXX    XXX     XX     XX     XX     XX     XX
New Hampshire        XX    XXX     XX     XX     XX     XX     XX
New Jersey           XX     XX     XX     XX     XX     XX    XXX
New York            XXX    XXX    XXX    XXX    XXX    XXX     XX
Oklahoma            XXX    XXX    XXX    XXX     XX     XX     XX
Oregon               XX     XX      X      X      X      X      X
Pennsylvania         XX     XX     XX     XX     XX     XX    XXX
Rhode Island        XXX    XXX    XXX    XXX     XX     XX    XXX
South Dakota          X     XX     XX     XX     XX     XX     XX
Utah                  X     XX     XX     XX      X      X    XXX
Vermont             XXX    XXX    XXX    XXX     XX     XX    XXX
Washington          XXX    XXX     XX     XX     XX     XX     XX
Wisconsin           XXX    XXX    XXX    XXX    XXX    XXX     XX
Wyoming               X     XX     XX     XX     XX     XX     XX

(a) Illinois supplements are determined on a case-by-case basis.

Notes: Converted to 2010 dollars using Consumer Price Index data
from Haver Analytics. NA indicates not applicable.

Sources: For 1975-2002, U.S. House of Representatives, House Ways
and Means Committee (2004); for 2009, Social Security
Administration (2009b).

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Introduction and summary

Expenditures on medical care by Medicaid and Medicare, America's two main public health insurance programs, are large and growing rapidly. Although Medicare is the main provider of medical care for the elderly and disabled, it does not cover all medical costs. In particular, it covers only a limited amount of long-term care expenses (for example, nursing home expenses). The principal public provider of long-term care is Medicaid, a means-tested program for the impoverished. Medicaid now assists XX percent of nursing home residents (X) and helps the elderly poor pay for other medical services as well. In 2009, Medicaid spent over $XX billion on X.X million elderly beneficiaries. (X)

An important feature of Medicaid is that it provides insurance against catastrophic medical expenses by providing a minimum floor of consumption for households. Although Medicaid is available only to "poor" households, middle-income households with high medical expenses usually qualify for assistance also. Given the ongoing growth in medical expenditures, Medicaid coverage in old age is thus becoming as much of a program for the middle class as for the poor (Brown and Finkelstein, 2008).

Another important feature of Medicaid is that it is asset and income tested; in contrast, almost all seniors qualify for Medicare. This implies that Medicaid affects households' saving decisions, not only by reducing the level and risk of their medical expenses, but also by encouraging them to consume their wealth and income more quickly in order to qualify for aid (Hubbard, Skinner, and Zeldes, 1995). Although Medicaid covers poor people of all ages, this article focuses on Medicaid's coverage for the elderly.

Many recent proposals for reforming Medicaid could have significant effects on the financial burdens of the elderly, on the medical expense risk that they face, and on their saving decisions. Moreover, Medicaid is a large and growing component of the federal budget. The share of total federal, state, and local government expenditures absorbed by Medicaid rose from less than X percent in 1970 to almost X percent in 2009, (X) and it is expected to increase even more in the future. Controlling the cost of Medicaid is an important component in correcting the federal government's longterm fiscal imbalance.

In this article, we describe the Medicaid rules for the elderly and discuss their economic implications. We focus on the rules for single (that is, never married, divorced, or widowed) individuals to avoid the additional complications involved in considering couples. The main difference between singles and couples is that the income and asset limits for Medicaid eligibility are higher for couples.

Medicaid is administered jointly by the federal and state governments, but each state has significant flexibility on the details of implementation; hence, there is large variation across states in income and asset eligibility and in coverage. This variation may well provide elderly people in different states with different saving incentives, and it might even encourage them to move from one state to another. We focus on finding the features common to all states, and identifying the most salient state-level differences.

Overview of the Medicaid program

Medicaid and Medicare were created by the Social Security Act Amendments of 1965. Although the program was initially intended to cover the population on welfare (for example, recipients of Aid to Families with Dependent Children, AFDC, or Supplemental Security Income, SSI), over time legislation has expanded coverage to non-welfare recipients overwhelmed by their medical costs. Box X provides a chronology of important Medicaid-related legislation for the elderly. Two key themes emerge from box X. First, Medicaid has increased the number of services provided over time. Second, Medicaid has attempted to limit the abuse of the system by using increasingly stringent and comprehensive asset tests to determine eligibility.

For our purposes, it is useful to divide elderly Medicaid recipients into three groups: X) the categorically needy, whose low income and assets qualify them for Medicaid. This group includes those who qualify for SSI, as well as "dual eligibles," whose Medicare deductibles and co-pays are covered by Medicaid; X) the institutionalized medically needy, who qualify for Medicaid because their financial resources do not cover their nursing home expenses; and X) the noninstitutionalized medically needy, who qualify for Medicaid because their financial resources cannot cover catastrophic noninstitutional medical expenses. Each group faces a different set of asset and income tests. Figure X presents data on Medicaid enrollment and expenditures. In 2008, Medicaid spent roughly $XX billion (X) on X.X million beneficiaries aged XX and older (data from the Center for Medicare and Medicaid Services). These data provide information on the number of people and expenditures in the different groups. Of those aged XX and older, SSI recipients account for XX percent of all beneficiaries and XX percent of all Medicaid expenditures. "Dual eligibles" represent XX percent of all beneficiaries and X percent of all Medicaid expenditures and are the second-largest group of Medicaid beneficiaries. "Medically needy" individuals represent XX percent of all beneficiaries and XX percent of all expenditures. "Others," a category largely made up of those with catastrophic medical expenses who are not technically "medically needy," represent XX percent of all beneficiaries and XX percent of all expenses. Although the Center for Medicare and Medicaid Services technically refers to "others" as categorically needy, a large share of this group are what we will refer to as medically needy, because their circumstances (catastrophic medical expenses) are more like those of the strictly medically needy than those of the other categorically needy groups.

The categorically needy: SSI beneficiaries

In most states, SSI recipients qualify for Medicaid as categorically needy recipients. Under the Social Security Act Amendments establishing SSI in 1972, states were mandated to provide elderly SSI recipients with Medicaid benefits. The law exempted states that in 1972 were using Medicaid eligibility criteria stricter than the newly enacted SSI criteria (Gruber, 2000). The XX states that had the more restrictive rules for Medicaid are referred to as XXX(b) states (Gardner and Gilleskie, 2009).

SSI pays monthly benefits to people with limited incomes and wealth who are disabled, blind, or aged XX years and older. There is a (maximum) monthly SSI benefit that is paid for by the federal government. States can supplement this benefit. Figure X plots the federally provided monthly SSI benefit from 1975 to 2010. Table X shows the state-level supplements for all states that have offered a supplement over the sample period. In contrast to the federal benefit, which in real terms has been constant, the state supplements have varied greatly over time as well as across states.

To qualify for SSI, individuals must pass both an income test and an asset test. In non-XXX(b) states, the income test is based on the combined federal and state maximum monthly benefit. Individuals with no income receive this maximum monthly benefit if they pass the asset test. Otherwise, each individual's "countable income" is deducted from the maximum to produce a net benefit. In most states, individuals receiving any benefit, no matter how small, are categorically eligible for Medicaid. This implies that the implicit marginal tax rate for the threshold dollar of countable income--the incremental dollar that pushes the individual over the income threshold--is extremely high, because that last dollar of income eliminates the individual's Medicaid coverage.

BOX X
Medicaid time line

Social Security Act Amendments of 1965

* Medicaid program enacted.

* Medicare program for the elderly
also started.

Social Security Act Amendments of 1972

* Enacted Supplemental
Security Income (SSI) program for elderly and disabled, replacing
state-level programs that served the elderly and disabled.

* Required states to extend Medicaid to SSI recipients or to elderly
and disabled meeting that state's 1972 requirements.

Omnibus Reconciliation Act of 1981

* Section XXXX(c) home- and community-based waiver program launched.
This program allows people with serious health problems to obtain
home-based care instead of nursing home care.

Tax Equity and Fiscal Responsibility Act of 1982

* Allowed states to make institutionalized individuals pay for
...