Will People Get Exchange Subsidies If Their State Doesn’t Expand Medicaid? Maybe!

Read the rest of Slate’s coverage on the Supreme Court upholding the Affordable Care Act.

As I wrote this morning, Chief Justice John Roberts threw a bit of a wrench into Democrats’ plans to expand health insurance coverage this morning. Congress anticipated that a lot of the additional coverage would come from a large expansion in Medicaid coverage, and to achieve that expansion, Congress deployed both a carrot (very generous subsidy to states that expand Medicaid) and a stick (withdrawal of existing subsidy from states that don’t). The Constitution certainly doesn’t state any limits on Congress’ power to spend money in pursuit of “general welfare,” but Roberts decided that the stick was a bridge too far and amounted to illegitimate coercion of the states.

So what happens when a handful of states don’t expand Medicaid?

I said this morning that people would go into the insurnace exchanges where they’ll collect subsidies to be able to afford insurance. This is true for people earning between 100 percent and 133 percent of the Federal Poverty Line, but it looks like there’s a fair chance that people will be ineligible for tax credits if they’re earning less than 100 percent of the FPL. Most such people in most states will, I repeat, end up covered by Medicaid anyway because the carrot is enticing. But some of them will end up with hardship waivers and no insurance.

From a humanitarian point of view, that’s terrible. From a research point of view, it will create an interesting situation. Say you’re $5 short of 100 percent of the FPL. Now suddenly an extra $5 in income is worth much more than $5 to you since you transition from no health care subsidy to the most generous form of health care subsidy around. It’s an enormous incentive to go the extra mile to earn that extra $5. So insofar as people in this situation are acting as rational maximizers, we should expect to see a “dead zone” in the income distribution of nonexpanding states where almost nobody is just below the threshold, with a smaller or nonexistent dead zone in the expanding states. Realistically, I’m not sure that low-income people have nearly the level of policy awareness that would be required to trigger this effect. But we may find out soon.