Sasha Indarte and Gideon Bornstein, assistant professors of finance at Wharton, investigate how the expansion of social insurance affects households’ accumulation of debt, in their 2023 paper. In this insightful interview, Professor Indarte dives into these findings and discusses their importance in the larger conversation around the economic resilience of households.
Your paper explores the relationship between social insurance programs like Medicaid and household debt. Could you provide a brief overview of your key findings?
Sasha Indarte: Studying the expansion of Medicaid under the Affordable Care Act, we find that this expansion of health insurance improved households’ financial resilience and ultimately led to higher credit card debt. By lessening the financial burden of medical expenses, households can become more financially resilient in the sense that they are less likely to default on debt payments. Consistent with this, we show that expanding Medicaid reduced debt in collections, lowered rates of delinquency on utility payments, and that overall delinquencies did not change (despite an increase in debt). As a result, credit scores also increased.
These improvements in financial resilience can expand credit access because a lower risk of default makes creditors more willing to lend. We find that most of the rise in credit card debt after expanding Medicaid can be attributed to an expansion of credit access (i.e., credit supply). And this expansion is “healthy” in the sense that it’s driven by improvement in financial resilience.
You estimate that a 1 percentage point rise in Medicaid-eligible population within a ZIP code causes a 0.46% increase in credit card borrowing. How does your analysis distinguish between correlation and causation?
Sasha Indarte: It’s difficult to estimate the causal effect of Medicaid on consumers because being eligible for Medicaid is correlated with a lot of other factors that also affect credit card borrowing. For example, qualifying for Medicaid requires having income below a specific threshold. However, income is an important factor used to determine credit card approvals and limits. So even if Medicaid improved access to credit, we might find a negative correlation due to income being correlated with both Medicaid eligibility and credit access.
To uncover the causal effect, we exploit a natural experiment. Specifically, the Medicaid expansions were staggered across states and how much they expanded insurance depended on the state’s pre-expansion Medicaid eligibility rules. Our approach compares ZIP codes that were similar, for example a similar income distribution, but differ in how much the eligible population and when the eligible population changed.
Were you surprised that credit card borrowing increased, or did this match your expectations?
Sasha Indarte: In theory, you could find either an increase or a decrease in credit card borrowing. There are competing forces that can work in offsetting ways. One we call the “direct” effect of expanding Medicaid. In essence, when health insurance expands, people do not need to rely on debt as much to maintain a given standard of living after incurring medical expenses. This direct effect leads to reduced credit card debt.
Another channel is credit demand. Without health insurance, consumers have an incentive to save more/borrow less in order to be able to afford medical expenses. Gaining access to insurance weakens the incentive to avoid borrowing, so this could lead to an increase in borrowing. Finally, there’s credit supply, which we find is the primary reason for the rise in borrowing. By reducing default, expanding health insurance can increase the supply of credit.
How do you see this research contributing to the broader conversation surrounding financial literacy and economic resilience across the U.S. (or globally)? What kind of impact do you hope your research will have on society?
Sasha Indarte: One of the big takeaways from our paper is that we could significantly underestimate the benefits of expanded social insurance if we don’t take into account how consumer credit markets react to these policies. We estimate that for Medicaid, around one-third of the total financial benefit (net of the cost of taxes to finance the expansion) is due to improved credit access.
The research also highlights how a lack of financial resilience can limit access to credit. Making people more economically resilient can help them “tolerate” higher levels of debt, enabling them to take advantage of the usefulness of debt while limiting downsides like the risk of future difficulties managing debt.
How would you see future research expand on the findings of this paper?
Sasha Indarte: The economics of what we study could arise in many settings. It would be useful to study other social insurance programs like unemployment insurance. Additionally, innovations that lead to new financial products that offer insurance could potentially have similar effects as well. Outside of consumer credit markets, many government policies and financial innovations provide de facto insurance to corporate or sovereign borrowers. For example, using a policy like the PPP Lending program to support business during the COVID recession could lead to expectations of similar policies in the future. Knowing that firms may have access to this kind of support in a recession could potentially improve access to credit before the next recession.
Learn more about Sasha Indarte and her research here.
Read more about this research on Knowledge at Wharton.