Supreme Court could disrupt prediction markets with nuanced decision on health care

Many people have money riding on the Supreme Court's verdict on the Affordable Care Act, which is expected Thursday, from health care executives to 24-year-olds hoping to stay on their parents' insurance a few more years. But none has a more direct financial interest in the decision than those who have gambled on the outcome on The price on the site currently rests at a 75 percent chance that the court will overturn the individual mandate provision at the center of the case. When the court issues its decision, those who placed bets will find out if they won or lost—probably.

Situations like this test the strength of the online prediction markets in two ways. First, it can be tricky to define court decisions in a way that's precise enough to make it clear who won, particularly if the court takes a surgical approach to the law. Second, the crowd is less precise when it assesses the judgments of nine secretive people, compared to predicting the outcome of a popular election.

First, there's the difficulty in deciding what to bet on. The Affordable Care Act consists of many different initiatives packed into one large law. At the core is the individual mandate, which requires that all Americans have health care or pay a tax. Several additional provisions stand out. The law requires that insurers make insurance available to people with preexisting conditions, expands Medicaid eligibility, sets up health insurance exchanges and allows dependents to stay on their family's health insurance through their 26th birthday, to name a few. It would be interesting to see how the wonkiest gamblers predict the fate of any of these provisions. But it would be a nightmare to write a legal contract in a way that would make it clear who won and who lost under the almost infinite possibilities available to the court.

Intrade encountered a similar quandary recently with its book on the control of the Senate. What everyone wants to know is which party will control the Senate after the upcoming election. But there is a non-negligible possibility that this won't be clear even after every election is decided, thanks to the role of independent senators. If, for example, Maine's Angus King is the swing vote in the Senate, how would one clearly define the outcome? What if he waffles on which party he will caucus with or refuses to state his choice officially until Jan. 2? Even if there's a general political consensus, it may not satisfy the language of the contract on which people placed money. In this case, prediction markets have three objective outcomes: Democratic control, Republican control, and neither, even though "neither" is very likely Democratic.

For Obama's health care law, the gambling is limited to whether the court overturns the individual mandate. Here, we see a curious phenomenon: The odds have steadily risen since the oral arguments, even though there has been virtually no new information relating to the justices who will make the decision.

The justices' aggressive questioning of the administration's lawyers during the oral arguments caused the odds of an overturn to jump. Since then, public sentiment has been one of the few relevant sources of information. Of course, public opinion should not have an impact on the outcome, but clearly the markets believe that it does. (There's some evidence for this. There was little discussion on the constitutionality of the law until public opinion turned against it.)

Since Monday's decisions on two other major cases, court watchers have attempted to divine the opinion on the health care act based on what hasn't yet happened. First, the court upheld part of Arizona's 2010 immigration law but struck down three major tenants of it with five votes. Second, the Supreme Court struck down Montana's limit on corporate donations, effectively ending meaningful campaign finance on all levels of government. This was a 5-4 decision along the same lines as Citizens United.

Some speculate that, because Chief Justice John Roberts did not write either of those major opinions, he has saved himself for a big opinion on Affordable Health Care—suggesting he is part of the conservative majority. The markets are unconvinced, having wavered after the Montana ruling, but returned to their exact starting point after the Arizona ruling. Within 48 hours, we'll know whether that was wise.

Follow along in real time with PredictWise.

David Rothschild is an economist. He has a Ph.D. in applied economics from the Wharton School of Business at the University of Pennsylvania. Follow him on Twitter @DavMicRot and email him at Want more? Visit The Signal blog, connect with us on Facebook and follow us on Twitter.