August 2, 2006
The Medicaid program is the largest payer of nursing home services in the nation. The magnitude of program spending and the anticipated program growth as the baby boom cohort ages have raised questions about how Medicaid affects private savings. This paper, which extends previous research, examines how high but uncertain nursing home expenses interact with Medicaid assistance to affect the savings decisions of working-age households. The analysis uses data from the Asset and Health Dynamics of the Oldest Old, and relies on variation in Medicaid eligibility standards over time and across states to estimate the effect of Medicaid on retirement wealth. Using a difference in difference methodology, this analysis finds that retirement wealth is about 15 percent lower for households living in states with easier access to Medicaid. This amounts to a difference of about $24,000, which is about one-third of median household net worth in the sample. The results are generally consistent with previous findings.