Policy Study

Health and Social Services in the Post-Welfare State

Are Vouchers the Answer?

Executive Summary

With the debate about the future of the welfare state in full swing, proposals to replace various government human-service programs with vouchers have suddenly taken center stage in the policy arena.

The White House has proposed converting most of the money spent on federal-housing and job-training programs into vouchers. Conservatives-longtime champions of vouchers for education and low-income housing-have recently proposed vouchers for Medicaid, Medicare and veterans’ health care.

While interest in vouchers is growing, little work has been done to systematically study the potential benefits and pitfalls of this approach. A close examination of three relatively long-running human-service voucher programs-food stamps and housing vouchers in the United States and nursing home vouchers in the United Kingdom-helps to shed light on the possible effects of replacing social service programs with vouchers.

The experience with these programs demonstrates that vouchers have numerous advantages over either direct government service delivery or contract delivery. Vouchers can:

  • reduce unit costs of services;
  • simplify monitoring;
  • increase choice;
  • lower administrative costs;
  • break the dependency of both government and the recipient on monopoly provision; and
  • allow for a better match between the preferences of the recipients and the services they obtain.

On the other hand, like all government social programs, vouchers also have unintended effects. Vouchers can increase efficiency, but only within expenditure levels set by politicians and bureaucrats.

* Part 1 in a 2 part series examining human-service vouchers.

In fact, experience demonstrates that the very advantages of vouchers-increased choice, better match of recipients needs to providers’ services, etc.-could unleash forces that make costs difficult to control.

By giving people the ability to choose their own service provider, vouchers make the public service more desirable and may thereby draw some people on the margins into the program who previously met their needs outside government. In this way, vouchers could have the effect of not only increasing program costs but moving some people from independence to government dependency-especially for services where an almost unlimited demand for the service exists, such as housing, job training and day care. To the voucher recipient such programs essentially offer “free” consumption of a good. The predictable result is unlimited demand.

For programs that are already essentially entitlements, such as Medicare or veterans’ health care, vouchers pose few major risks. In fact, in both programs, vouchers would likely reduce costs and increase quality.

But for other social programs, the only way to eliminate the potential for such effects is by getting government out of the financing and delivery altogether. This would mean moving towards a system in which mediating institutions-families, churches, neighborhoods and community groups-not government, would play the primary role in meeting social needs.

For many human-service programs, such an approach is probably not feasible in the short term. If governments choose to transition to vouchers, the problem of unlimited demand must be addressed. To do so, governments should set a limit on the total amount of support any individual may receive. This can take the form of either a maximum dollar expenditure, a time limit, or a loan instead of a grant. Limits should also be set on overall program expenditures.