From the abstract:
This paper uses a panel of U.S. states over 20 years to examine state government demand for the provision of low income public health care through the Medicaid program. Reallocation of expenditure within the program and between other expenditure is modeled using the demand system developed in Deaton and Muellbauer (1980). I disaggregate the recipient population of Medicaid into distinct demographic groups consisting of the elderly, the disabled, and families, and estimate inter-group substitution patterns between the recipient and benefit dimensions of programmatic design. Several hypotheses of state government behavior are tested and the resulting estimates provide an important cautionary tale to major policy changes in public health care provision as significant cross price elasticities are found for all three of the component groups considered.
In this research I push to understand how state governments in the U.S. adjust their Medicaid programs in response to program cost increases, such as an increase in the number of recipients or in the cost of health care services. It is imperative to develop a clearer characterization of state response to budgetary pressure in order to accurately evaluate policies affecting public programs jointly administered by federal and state governments. This paper takes an important step towards quantifying the extent to which state governments reallocate expenditure when faced with cost increases, and shows that major changes in public health policy can have unintended consequences beyond legislative objectives.