Is Medicaid crowding out other state government expenditure? Internal financing and cross-program substitution

We examine whether state government responses to rising Medicaid costs cause reduced low income assistance, overall state budget cuts, or higher taxes. We segment Medicaid recipient groups into families, the disabled, and the elderly. Using GMM estimation, we instrument for endogenous program participation using federally directed program recipients in a panel of 47 states from 1976 to 2004. We find that half of cost increases for elderly recipients are financed by own benefit decreases. We find that the disabled group increases Medicaid for all through cuts in other government expenditure, family recipients erode Medicaid benefits and cash assistance, Medicaid only for families is increased because of AFDC matching elimination, and taxpayers fund no cost increases.