When higher income has a downside

Public policy can be difficult to get right, and incentives can have unintended consequences. KFF Health News published a piece describing the challenges that a "benefit cliff" caused. Medicaid provides health insurance for low-income individuals. Understandably, there is an income threshold, above which individuals are no longer eligible. In practice, however, this means that individuals who are earning just under the threshold could perversely end up worse off if they receive enough income to exceed the eligibility threshold, but not enough to cover insurance premiums. The person profiled in the article decided to under-report his income, noting "I don't want to be a fraud. I don't want to die ... Those shouldn't be the only two options."

A better way of handling income eligibility would be to price the Medicaid insurance premium, and then cover it completely for individuals whose income is below a certain threshold. Then, as people's incomes rise, the subsidy is decreased, but the individual is always better off when making a higher income. At some income level, the subsidy would disappear entirely.