The intestinal worm Necator americanus (commonly known as
hookworm) arrived in the warm, humid climate of the South
with the slave trade and remained endemic there until the
1950s. Hookworm spread through people’s bare feet around
unsanitary privies, and in the early 20th century 40 percent of
children in 12 states from North Carolina to Texas were infected.
Worms consumed their victims’ blood, causing listlessness,
lack of focus, and stunting, especially in children, who often
missed school or couldn’t pay attention.
Hookworm took an enormous toll on health—so much
so that it held back the Southern economy. The parasites
“so lower the vitality of those who are affected as to retard
their physical and mental development … [and] make labor
less efficient,” wrote a group of physicians and civic leaders
in 1909, and the disease was “seriously affecting economic
development.” Stock prices of cotton mills in highly infected
areas ran noticeably lower than in areas with lighter infection
because “it takes, by actual count, about 25% more
laborers to secure the same results in the counties where the
infection is heavy.”
The story of hookworm illustrates a fundamental, but
often overlooked, input into economic growth: health. Classical
economic models view output in terms of machines and
materials, work hours, workers’ skills, and the technologies
that combine them. When people are unhealthy, the middle
of this equation falls out. Sluggish students cannot learn. Sick
workers cannot produce. Economic growth benefits from
population health.
Health remains a key issue in discussions about the U.S.
economy today. In fact, 8.6 percent of U.S. gross domestic
product goes toward public programs that are meant to
support health. Most of this spending is for the public health
insurance programs Medicare and Medicaid. But does this
spending actually maintain health, and if so, does that deliver
economic benefits? In this article we review evidence on the link between one specific type of health spending, Medicaid’s
coverage of children, and how those children influence
the economy when they grow up.
Medicaid’s coverage of children
Today Medicaid provides health insurance to over 35 million
children 18 and under and about 1.5 million pregnant women,
representing about 47 percent of American kids and 41 percent
of births. Children typically qualify for Medicaid based
on income, and once they are on the program, they usually
pay nothing for medical care. Health care providers who treat
them are reimbursed by the state Medicaid agency or a private
insurance plan funded by Medicaid. No other income-tested
program reaches as many children and, to the extent that
Medicaid affects their health, no other program has such
scope to shape their economic trajectories.
President Lyndon B. Johnson’s 1964 “poverty tours” helped bring attention to the role that poor health plays in economic outcomes.CSU Archives/Everett Collection/Alamy
When Medicaid was born in 1965, the link between health
and productivity was fresh in policymakers’ minds. A 1964
Department of Defense report found that a full one-third of
18-year-old men would fail to meet peacetime standards for
military service, with about half of these disqualifications related
to preventable health issues. About one-third of children—but almost all poor children—lacked health insurance, and less
than half of the children with incomes in the bottom 10 percent
even visited a doctor each year (Goodman-Bacon 2021).
In response to these concerns about health outcomes for
America’s youth, President Lyndon B. Johnson proposed a
public insurance program: Medicaid. On Medicaid, low-income
Americans could receive medical care from existing
providers, who would then be paid with public funds. The
federal government pays most of Medicaid’s costs, but states
mostly run it. Programs began operating in 1966, and by 1975,
they covered 10 million children, a dramatic increase from the
mid-1960s (Figure 1). At the same time, the number of children
with no insurance fell by almost the same amount, and
the poorest children in the country began to see doctors at the
same rates as everyone else, with approximately 70 percent
visiting a doctor in a year (Goodman-Bacon 2021).
Loading figure 1…
Originally, Medicaid served children whose families received
cash welfare, but over time, federal mandates have made
Medicaid eligibility more generous. In the 1980s, policymakers
sought to expand coverage by moving children’s Medicaid
eligibility to a simpler standard: family
income itself. Over the next decade and
a half, the number of children enrolled
in Medicaid increased from about 9.3
million in 1980 to 17.1 million in 1995
(Figure 1). Today, states must cover all
children in households with income less
than 133 percent of the federal poverty line (which comes to
about $44,000 for a family of four), but all states go beyond
that, extending coverage to children in families earning as
much as 400 percent of the poverty line.
In 2023, Medicaid spent about $4,000 per child, not much
different from the average cost of care for children not on Medicaid. This spending is skewed toward children with the
kind of health needs that can shape health and productivity
years later. For example, half of preterm births in the U.S.
are covered by Medicaid (Meltzer and Markus 2020), and
the acute care that helps these infants regulate their body
temperature, absorb oxygen, and finish their physical development
has been shown to raise academic achievement in
elementary, middle, and high school (Bharadwaj et al. 2013).
But high spending on critical needs is not the only way that
Medicaid might have longer-run effects. The program also
funds a large amount of low-cost prevention. In fact, at least
80 percent of children on Medicaid use very little costly care,
but nevertheless receive important screenings, checkups, and
preventive services (Kuo and Houtrow 2016).
A large research base tries to understand how and how much
Medicaid coverage affects children’s health in the short run.
This evidence consistently shows that Medicaid boosts health
care use and improves health, especially for the lowest-income
children. By the end of the 1970s, for instance, Medicaid had
saved about 35,000 children’s lives by supporting better delivery care for infants and protecting younger children against
infectious diseases (Goodman-Bacon 2018). As it expanded to
other low-income families in the 1980s, Medicaid generated
similarly large health improvements (Currie and Gruber 1996a,
1996b). Expansions to higher-income
children, however, did not have such
profound effects (Currie et al. 2008),
perhaps because many of these families
already had access to insurance
(Lo Sasso and Buchmueller 2004).
One of Medicaid’s benefits is its Early and Periodic Screening, Diagnostic, and Treatment program. This includes the type of hearing, speech, and language assessment pictured here in 1980.Southern University and A&M College/
A longer-term view raises further
questions about childhood Medicaid
coverage—the same kinds of questions
that arose alongside hookworm infections decades earlier.
Do Medicaid’s short-run health effects last into adulthood?
Do they open up the pathways through which children gain
skills and grow into healthy, productive workers? Does Medicaid
ultimately feed back into the economy?
Medicaid’s lasting effects on the labor force
The millions of children originally covered by Medicaid provide
the first good opportunity to learn whether and how the program
shapes economic outcomes down the line. Medicaid’s original
connection to cash welfare programs meant there was meaningful
variation across states in the share of children who received
any coverage and the number of years they were covered.
For example, about 1 percent of White children in Virginia
gained access to Medicaid when it began, compared
with 3 percent in Tennessee. And these differences added up
across childhood. The average child born around the mid-1960s in the top half of states ranked by this welfare-based
Medicaid eligibility measure accumulated about 1.5 years of
Medicaid eligibility before age 11; kids from the bottom half
of states gained one year. Practically, this meant that kids in higher-welfare states grew up with more opportunities than
similar kids from lower-welfare states to see doctors, get prescriptions,
receive screenings, and undergo surgical procedures
as a result of Medicaid. If this spending prevented or
treated illnesses, made it easier to attend and focus on school,
and ultimately made for healthier adults, we should see better
economic outcomes for people who grew up in states with
higher Medicaid eligibility.
This is exactly what census data from the 2000s show. Figure
2 plots differences in adult employment rates (in yellow)
between kids born in higher- versus lower-welfare states by
birth cohort. There is little difference in employment rates in
the two groups of states for adults born long before Medicaid
was available (the yellow line is close to zero). But among people
who were in elementary school or younger when Medicaid
began, adult employment rates are higher by about one-half
of a percentage point for those who grew up in higher-Medicaid
areas. Adjusting for differences in cumulative childhood
eligibility across states suggests that raising average childhood
Medicaid eligibility by one year raises employment by about 4 percentage points (Goodman-Bacon 2021). This is a
substantial effect when compared with the national employment-to-population ratio, which rose by about 10 percentage
points from its trough in the 1950s to its peak in 2000.
Loading figure 2…
Measuring earnings instead of just employment, which
incorporates both who enters the workforce because of Medicaid
and any effects on education or productivity of workers,
shows that groups with one additional year of average childhood
eligibility experienced a 2.7 percent increase in earnings,
concentrated among lower-income workers most likely
to have used the program. To put this in context, each year
of early life Medicaid exposure raises earnings by almost as
much as a year of adult labor market experience.
These labor market effects appear to stem from just the kind
of health improvements that Medicaid’s architects had in mind.
Figure 2 also shows that adult disability rates are systematically
lower for the cohorts and states where Medicaid raised employment.
Unlike in cases of specific pathogens, such as hookworm,
Medicaid provided broad-based care against childhood ailments.
Occupational therapy to manage physical limitations,
prevention or early treatment of acute infectious diseases that
have longer-term consequences, and early diagnosis of chronic
and potentially deadly or disabling conditions could all underlie
the program’s long-run health effects. Other research confirms
this finding. Early Medicaid coverage in the 1960s and
1970s is associated with lower adult mortality, disability, and
chronic disease burden (Boudreaux et al. 2016; Sohn 2017;
Goodman-Bacon 2021), explaining why an investment in children’s
health ultimately paid off in the labor market.1
A second chance to learn about Medicaid’s effects on labor
market outcomes came in the 1980s, when eligibility was
expanded beyond its original link with cash welfare. Some
states already covered most poor children, so new federal
mandates that set income-based eligibility rules resulted in
very little new Medicaid coverage. In other states, however,
thousands of children gained coverage for the first time.
A series of different research teams took advantage of this
variation across states to study the long-term impacts of these
1980s-era expansions, and all pointed toward the same conclusions
as the 1960s-era research. Medicaid led children to
perform better in school, repeat grades less often, graduate
high school at higher rates, and attend and finish college more
(Thompson 2017; Cohodes et al. 2016). Newly covered children
were diagnosed with and hospitalized for fewer chronic
conditions than other children, and their mortality rates
as teenagers and young adults were lower (Thompson 2017;
Wherry et al. 2018; Miller and Wherry 2018; Brown et al. 2020).
The effects continue to echo: Girls who gained Medicaid coverage
as children in the 1980s went on to give birth to healthier
babies in the 2000s (East et al. 2023).
As in the 1960s, improvements in health and education
went hand-in-hand with better labor market outcomes. For
example, one study compared kids whose birthday happened to fall on either side of a strict eligibility cutoff
in a 1991 Medicaid reform. It found that Medicaid
eligibility reduced later-life incarceration
(Arenberg et al. 2024), a finding echoed
in more recent work looking at children who
lose access to mental health therapy and
medications when they become too old to get
Medicaid (Jácome 2024). More broadly, the
largest study, based on tax data, found that
each year of Medicaid eligibility in childhood
raised annual earnings by about 0.8 percent
(Brown et al. 2020).
Medicaid in childhood and long-run
effects on the economy
Together, this evidence on Medicaid’s long-run
effects is broadly consistent across studies,
research teams, datasets, and policy regimes.
But are these benefits large enough to affect
the economy? Traditional economic models
provide one way to connect the findings
about childhood Medicaid and adult earnings
to conclusions about aggregate economic output (Weil 2007).
If earnings reflect the value of what workers produce, then
the earnings gains from Medicaid are also its contribution to
national output.
To measure this, we first calculate the effect of Medicaid on
adult earnings for each birth cohort based on their amount of
childhood exposure. People born in 1965, for example, accumulated
almost one year of eligibility during the earliest era
of Medicaid policy, raising their earnings by almost 2.7 percent.
Cohorts born in the 1980s accumulated about four years
of Medicaid exposure because they were children during the
period when eligibility expanded. Combining this with the
findings on Medicaid’s labor market effects suggests that their
childhood eligibility raised these cohorts’ average earnings by
as much as 6 percent.
Medicaid led children to perform better in school, repeat grades less often, graduate high school at higher rates, and attend and finish college more.
Next we calculate the share of total earnings in a given year
that come from each cohort, a measure of their contribution
to aggregate output. The 1965 cohort, for example, is relatively
large. In 2005 at age 40, they were near the peak of their earnings
profile, meaning their contribution to aggregate output
was large. By 2024, however, the 1965 cohort was smaller in
number and had lower mean earnings because some left the
labor force. Their 6 percent earnings gain because of Medicaid
thus translates to less of an effect on the overall economy.
Similarly, the contribution of the 1980s cohorts to aggregate
output started out small in the 2000s, when early career earnings
were low, but grew over time as these cohorts reached the
peak of their earning capacity around 2024.
Applying Medicaid’s estimated earnings effects to these
cohort-specific contributions in 2005, 2015, and 2024 gives
us a guess about how much Medicaid coverage of children raised total output later on. The results suggest
that the history of child Medicaid spending
raised the level of U.S. GDP by 1.8 percent in
2005, 3 percent in 2015, and 4.2 percent in 2024.
That translates to $1.2 trillion in 2024 (at 2024
prices)—more than the cost of the entire Medicaid
program (which includes care for older people and people
with disabilities).2 While Medicaid’s impact is a one-time
benefit, its size is on par with annual GDP growth in these
years, which averaged 3.1 percent.
Medicaid’s long-run effects may also matter for economic
output by easing federal budgets. Medicaid’s long-run health
and labor market effects led adults to receive less from safety-
net programs, especially those aimed at people in poor
health, and to pay more in income taxes (Goodman-Bacon 2021; Brown et al. 2020). These savings to the government
are now greater than the original cost of covering children
through Medicaid during the program’s first three decades. To
the extent that these savings ease pressure on governments to
raise revenue in ways that may depress economic growth, or to
shift spending toward other productive uses, Medicaid may be
raising output by even more.
Medicaid funding and health care sector economics
Today’s debates about Medicaid do relate to economic growth,
but they often have more to do with the nearly $1 trillion program’s
role in the health care industry than with its enrollees.
In 2022, nearly 15 million people were employed in the health
care sector, representing about 9 percent of all jobs in the U.S.
economy. Medicaid financially supports the hospitals and
clinics where these workers are employed, especially in rural
areas where nearly 1 in 4 people have Medicaid coverage. With
rural hospital closures surging, the role of Medicaid in keeping
the labor market stable and health care in good supply in
these areas is a key concern.
But despite bringing in revenue for hospitals, Medicaid
is an imperfect source of support for health care providers. The program reimburses providers at a lower rate than commercial
insurance plans and is far more likely to deny medical
care claims. As a result, a typical Medicaid visit generates about
$87 in revenue for a physician, while a visit from a commercially
insured patient generates $178 (Dunn et al. 2024). These low
reimbursement rates likely dampen any beneficial effect of the
program on the health care sector’s employment and output.
Yet boosting reimbursements is no easy fix. Medicaid is
already costly to both federal and state governments, representing
nearly 20 percent of state general funds in 2024. Medicaid’s
price tag creates pressure to raise revenue or forego other spending
priorities, both of which may dampen economic growth.
Therefore, while research clearly shows that Medicaid can deliver
long-run economic benefits, a program of its size can also
generate large short-run costs.
From childhood health to a lifetime
of learning and earning
Students participate in English class at a Houston, Texas, high school in 1993. Research shows part of Medicaid’s economic benefits come from helping children complete more schooling.Paul Howell/Hulton Archive/
Not long after the economic costs of hookworm became clear,
John D. Rockefeller Jr., motivated both as a philanthropist and
an industrialist with a stake in Southern productivity, pledged
to fight the parasite. The newly formed Rockefeller Sanitary
Commission provided thousands of 50-cent doses of thyme oil
to treat infection and scores of new latrines to prevent its spread.
The costs were modest, but the returns were huge. School attendance,
performance, and even literacy rates jumped in the
South, and years later, children who avoided hookworm grew up
to earn 40 percent more than they otherwise would have, meaningfully
shrinking the income gap between the North and the
South (Bleakley 2007). A simple investment in children’s health
became a massive investment in the region’s economic future.
Medicaid has the same goal. In a message to Congress recommending
a 12-point program for America’s children, President Johnson argued that “our whole society pays a toll for the
unhealthy and crippled children who go without medical care:
a total of incalculable human suffering, unemployment, rising
rates of disabling disease, and expenditures for special education
and institutions for the handicapped.” Now, 60 years later,
we are in a position to evaluate whether Medicaid addressed
Johnson’s observation. It did. Maintaining child health shapes
a lifetime of learning and work. Evidence now shows that this
force, multiplied across millions of children, can also shape the
growth of an economy.
This article is featured in the Fall 2026 issue of For All, the magazine of the Opportunity & Inclusive Growth Institute
Endnotes
1 Medicaid also boosted the labor market by maintaining the population itself.
Perhaps 2 percent of people exposed to Medicaid as young children survived to
2015 because of it, and a large share of them likely worked.
2 This finding also lines up broadly with a recent analysis by the Congressional
Budget Office, which (based on the same body of research) used an annual
earnings effect of 0.5 percent per year of childhood eligibility. Applying this
number to average childhood Medicaid eligibility, which was 5.8 years in 2024
(adjusted to account for different cohorts’ earnings), gives a similarly large
output effect of 2.9 percent.
