Would the poor prefer cash instead of Medicaid?

(Bloomberg View) — Medicaid is the nation’s largest means-tested transfer program, and even conservatives generally acknowledge that it makes its recipients better off. It’s hard not to make people better off when you’re giving them something for free that they would otherwise have to pay for. At the very least, those people now have more money in their pocket that they can use to pay for something else.

The question still remains: How much better off? What, in other words, is the value of the transfer to the people who are getting health care through Medicaid?

In a new paper, Amy Finkelstein, Nathaniel Hendren and Erzo F.P. Luttmer note that the Congressional Budget Office values the transfer at the amount of money the government is spending on Medicaid. But of course, the value to recipients of any “in kind” benefit has only a weak relationship to the actual amount of money spent. If I give you a Doberman pinscher and $3,000 worth of shampoo samples marked “not for resale,” I have certainly transferred something with value, but most people would probably not pay $3,000-plus for it, even if they had the money.

So instead, they looked at data from the Oregon Medicaid Study to try to get a more nuanced assessment of the actual value to the people the benefit is supposed to be for. Here’s what they came up with: “Our baseline estimates of the welfare benefit to recipients from Medicaid per dollar of government spending range from about $0.2 to $0.4, depending on the framework, with a relatively robust lower bound of about $0.15.” You read that right: 15 cents of value for every dollar spent.

Undoubtedly one can quibble with various aspects of their model, and of course, the data they’re relying on comes from a study that ran only two years, so it may have missed longer-term health benefits that the study couldn’t pick up. Still, as methods go, it’s considerably more sophisticated than just assuming that recipients value every dollar of medical spending at a full dollar, and only and exactly a full dollar.

And yet, something still feels unsatisfying, doesn’t it? The logical inference — that we should cancel Medicaid and give people cash — surely isn’t quite right. Right?

Perhaps you are thinking that people really like health care benefits, so this result must be wrong. And it’s true, people do really like health care benefits. Unions will sacrifice quite a lot of compensation to keep those gold-plated health plans intact. But it doesn’t necessarily then follow that low-income people who qualify for Medicaid would therefore prefer Medicaid over a simple cash transfer. People like a lot of things, and when your budget is tight, you might well prefer a reliable car or money for your daughter’s prom dress to antibiotics for your strep throat.

I think the main problem has to do with the way that economists calculate utility, and what that can and cannot tell us about public policy. Your personal utility for some good or service is, of course, not possible to accurately measure. So one way to assess what your utility is, is to compare your valuation of that stuff with your valuation of other stuff. If you would voluntarily exchange one thing for another, then we say that you must value the object you get as equal to or higher in value than the one you traded away.

Let’s reduce to absurdity to see the problem with this economic model as a guide for public policy. Using this definition of utility as your sole guide to public policy sort of implies that the government should subsidize cocaine for addicts. (Stay with me here, and it’s OK to laugh. I’m mostly joking.)