The effect of Medicaid wage pass-through programs on the wages of direct care workers

Despite growing demand for nursing and home health care as the US population ages, compensation levels in the low-skill nursing labor market that provides the bulk of long-term care remain quite low. The challenge facing providers of long-term care is that Medicaid reimbursement rates for nursing home and home health care severely restrict the wage growth that is necessary to attract workers, resulting in high turnover and labor shortages. Almost half of US states have responded by enacting "pass-through" provisions in their Medicaid programs, channeling additional long-term care funding directly to compensation of lower-skill nursing workers.

We test the effect of Medicaid wage pass-through programs on hourly wages for direct care workers.

We estimate several specifications of wage models using employment data from the 1996 and 2001 panels of the Survey of Income and Program Participation for nursing, home health, and personal care aides. The effect of pass-through programs is identified by an indicator variable for states with programs; 20 states adopted pass-throughs during the sample period.

Workers in states with pass-through programs earn as much as 12% more per hour than workers in other states after those programs are implemented.

Medicaid wage pass-through programs appear to be a viable policy option for raising compensation levels of direct care workers, with an eye toward improving recruitment and retention in long-term care settings.