Elderly Assets, Medicaid Policy, and Spend‐down in Nursing Homes

Recent economic research has suggested that Medicaid long‐term insurance may reduce the personal savings levels of elderly citizens. This analysis shows that the opposite behavior, due to welfare aversion, actually happens. Barring any behavioral effects, personal wealth and income alone should determine the length of time an individual must stay in a nursing home until spend‐down occurs. Wealth and income data from two different samples of the elderly are used to predict the distribution of time until spend‐down, which is then compared with the actual distribution of the time until spend‐down among residents of nursing homes. Contrary to expectations, it appears that the elderly receive transfers to avoid Medicaid eligibility. This result cannot be explained away by sample selection, demographics, or uncertainty about prices. One implication of this result is that Medicaid could expand eligibility by raising the asset limit without dramatically increasing expenditures or the number of residents who spend‐down.