Medicaid and the housing and asset decisions of the elderly: Evidence from estate recovery programs

I examine the impact of Medicaid on elderly housing and portfolio decisions by using recent state-by-calendar-year level variation in the Medicaid treatment of owner-occupied housing assets from the adoption of Medicaid estate recovery programs. Prior to the adoption of these programs, the house, which represents the most important non-pension asset to the elderly, was exempt from determining Medicaid eligibility and served as both a place of residence and a store of wealth. Adoption of estate recovery programs changed the owner-occupied housing safety net by making the house eligible for recovery by the government, which increased the implicit tax of holding owner-occupied housing. Using data from 1993 to 2004 in the Health and Retirement Study on elderly individuals, I find that state adoption of estate recovery programs makes the elderly decrease homeownership by 4.6%, decrease home equity by 15%, and also decrease the housing share of the elderly wealth portfolio. State adoption of these programs results in elderly baseline homeowners being 33% less likely to own their homes at death and more likely to use a trust as a substitute to housing in order to preserve assets and carry out bequest motives at death.