Today’s Supreme Court decision is a huge gift to economists.

Both of the big parts of the decision handed down today on the constitutionality of the Affordable Care Act provide the framework for two natural experiments of massive scale for economists (and other social scientists). Hopefully I may even be able to dip into this subject to some good effect by 2015.

The part in which the court ruled against the government says that the government may withhold the new funding it will provide to states as part of the large-scale expansion of Medicaid coverage (which amounts to about 90% of the cost increase for the first decade), but that it MAY NOT withhold previously provided Medicaid funding for states that refuse to participate in the expansion (the biggest feature of which is increasing Medicaid coverage to single adults earning up to 133% of the federal poverty level).

What this will do for economists is to provide a very discreet “off” to “on” state for economists, sociologists and others to observe what happens in a variety of US states when a major expansion of access to healthcare occurs. This has ramifications for those studying human capital models, well-being, health care costs and more. This is, of course, presuming that some or most (all?) of the states who sued over the act decline to expand their Medicaid program. A couple of interesting features in common among these states are the following:

1) Most of the states in the suit are among those with the highest levels of uninsured people. This should tend to magnify the observable differences between states with low levels of insurance coverage and those with approximately universal coverage after 2015.

2) Most of the states party to the suit are essentially (at least posturing at) refusing a decade of free-riding on the taxpayers of states who declined to join the suit. This is interesting because most of the states suing are net recipeints of federal tax money, in other words, they recieve more from the federal government in the form of highway funds, grants, Medicare funding, unemployment insurance support, and so forth, than the citizens of the state pay in income and other taxes.

Peruse these three maps to get a sense of the oddity of this situation. It seems likely that at least a few of the ideologues running these states may wake up to naked state-self-interest and cave but, presumably, at least a few will not.

Here is a link to a recent Planet Money podcast/story covering a smaller such experiment that points strongly to the conclusion that Medicaid coverage has positive benefits for the recipients with some evidence of spillover effects on society more generally.

The second major issue, that of the individual mandate and the penalty (aka tax) that made it pass muster for Chief Justice Roberts should provide some interesting data on the threshold of effective taxation in spurring alternative actions that have (apparently) ideological ramifications, among other things. In essence, it puts a price on ideology for some disgruntled citizens. This part of the legislation will also be a major proving ground between those who assert that rising healthcare costs are primarily due to adverse selection effects (i.e. people who have greater need for expensive medical care are the ones who avail themselves of insurance, while those who know they are quite healthy stay out of the market, creating an information assymetry in which insurers are undercharging on average for insurance, but leading to higher and higher premiums over time as they try to play catch up) and those asserting that insurance itself creates moral hazard problems (i.e. people who have insurance consume more health care than they need since they don’t see the costs of their decisions a la carte, they or their employers simply pay a fixed amount, notwithstanding copays). At any rate, this development should provide a much more clear example than the mixed results experienced so far in Massachusetts in terms of costs. (Massachusetts is already moving on new legislation to better align the incentives of health care providers with taxpayers, a move which may be echoed nationally as well.)

It should be interesting times. Hopefully it will also make life better for a lot of people.


About theunlikelyeconomist

theunlikelyeconomist is in the midst of the long slog to attain a PhD in economics.
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