The study, by Nathaniel Hendren, an economics professor, and Ben Sprung-Keyser, a graduate student, was published in the August edition of The Quarterly Journal of Economics and analyzed 101 government programs begun since the 1960s. Like standard cost-benefit analyses, it quantified the benefit for each one, like higher take-home pay and lower out-of-pocket medical spending, as well as the government’s direct costs.
The researchers took an extra step, though, and accounted for the “fiscal externalities”: the indirect ways that a program affected the government’s budget. These effects arose because the programs changed the choices that participants made. For this part of their research, Mr. Hendren and Mr. Sprung-Keyser drew on previous studies that quantified many of these ripple effects.
Consider one program: health insurance for pregnant women. In the mid-1980s, the federal government allowed states to expand Medicaid eligibility to more low-income pregnant women. Some, but not all, states took up the offer. Increased Medicaid coverage enabled women to receive prenatal care and better obstetric care, and to save on personal medical spending.
For the federal government, the most straightforward fiscal impact of this expanded coverage was increased spending on health insurance. The indirect fiscal effects were more complex, and could easily be overlooked, but they have been enormous.
First, newly eligible women had fewer uninsured medical costs. The federal government picks up part of the tab for the uninsured because it reimburses hospitals for “uncompensated care,” or unpaid bills. Thus, this saved the government some money. On the other hand, some of the women stopped working, probably because they no longer needed employer-provided private health insurance, and this cost the government money.