Heterogeneity in crowd‐out by risk aversion: Assessing the effect of the ACA Medicaid expansion

Abstract

In this study, I estimate the heterogeneity in the crowd‐out of private health insurance by risk aversion with the Medicaid expansion under the Affordable Care Act. Using data from the Health and Retirement Study, I find that the Medicaid expansion led to a decrease in private coverage among risk‐loving individuals by 5 percentage points. However, the expansion did not lead to any meaningful change in private coverage for risk‐averse individuals. This finding suggests that risk‐averse individuals are willing to keep their private coverage, even though they become eligible for Medicaid. This potentially signals a sorting effect into private insurance. Under the assumption that highly risk‐averse individuals typically display superior health conditions, this preferential behavior could signify a form of advantageous selection into private insurance. Furthermore, the expansion increased Medicaid coverage by 3.4 percentage points for risk‐loving individuals, while not causing any discernible change in coverage among risk‐averse individuals. Such differential responses could potentially influence the risk composition of Medicaid coverage, and subsequently impact the cumulative expenditure associated with it.