This Just In: Obamacare Distorts Markets

Drew Gonshorowski / July 19, 2013

Newscom

A working paper recently published by the National Bureau of Economic Research (NBER) evaluated the effect of a large disenrollment in the Medicaid population in Tennessee. The results of this paper are not unexpected: People who value health care will find a way to obtain it.

In the case of Tennessee, this meant that once individuals lost their Medicaid coverage, many found work in order to obtain new, private coverage. The paper concludes that Obamacare’s expansion of Medicaid coverage will discourage work in the same way that disenrollment encourages work. While a disenrollment makes leisure more expensive, an expansion makes leisure less expensive. An estimated 530,000 and 940,000 people (or 0.3–0.6 percent of the aggregate employment rate) will choose not to work.

This is a classic case of market distortion, in which a person changes behavior due to policy considerations. The Medicaid expansion provides for a certain group of these individuals a choice to obtain coverage without it being tied directly to employment. These individuals may work only because they desire to have health care coverage and are apprehensive about searching for a private plan on their own. Being able to obtain health coverage without work makes leisure a more attractive option. Whether this choice or coverage option is positive is a contentious topic.

Another important point is that the NBER paper’s calculations are based on the entire country expanding Medicaid. As we know, several states have opted out of expansion already. This will serve to mitigate the crowd-out to a certain extent, since a non-expansion does not introduce such disincentives to work.

In addition to the possibly substantial effects on labor supply, there remains the question of the budgetary destruction that funding such a transfer causes. A state that chooses not to expand Medicaid not only mitigates these discouragements to work, but these states will also reduce the burden of nationally funding the program.

Additionally, as the authors of the NBER paper point out, questions of labor demand are not within the scope of their analysis. Obamacare’s various pressures on employers will lead to even further distortions of labor markets, including considerations on shifting workforces to more part-time labor.

The NBER study is just another example of how Obamacare distorts the choices that people face when purchasing health care. This distortion represents drastic increases in costs. While this estimate is a possible worst-case scenario, it is a very important consideration for many states evaluating the costs and benefits of Medicaid expansion. A state’s choice to not expand Medicaid not only saves money from a budget viewpoint but also encourages work.