Preliminary

States have considerable flexibility in determining Medicaid policies that may affect the long term care decisions of the elderly. Using data from the 1993, 1995, 1998, and 2000 waves of the Assets and Health Dynamics Among the Oldest Old Survey, we estimate a dynamic empirical model of health transitions, health insurance coverage, long-term care arrangement, and savings and gifting behavior over time. We focus on quantifying the effects of state Medicaid policies on the savings and gifting decisions of elderly individuals and their related decisions to enroll in Medicaid. Using the estimated model to simulate behavior over time and to evaluate the effects of changes in different Medicaid policies, we find that most of the Medicaid policy variables that differ across states have a significant but small effect on Medicaid enrollment and the savings decisions of the elderly. For example, a doubling of the asset and spousal protection limits for nursing home coverage increases the amount of assets held by 4 to 8 percent, does not significantly affect gifting behavior, and increases the probability of Medicaid enrollment by 0.1 to 0.6 percentage points