Economics of the Affordable Care Act

Abstract 

The Patient Protection and Affordable Care Act (PPACA), popularly known as the Affordable Care Act or Obamacare, was enacted in 2010. The act states that healthcare is a right for all Americans and not a privilege. Affordable Care Act aims to reduce the number of uninsured Americans and make healthcare affordable. In general, Congress, policymakers, economists, and Americans were divided on the issue, but the passage of PPACA was one of the most significant agendas for the Obama administration. The Congressional Budget Office established that with the Affordable Care Act, it would be possible to insure 94% of Americans under the $900 billion limit by bending the cost curve. The research paper aims to explore the Affordable Care Act’s economics in detail to understand its impact on insurers, providers, and reimbursement. 

Introduction 

The Affordable Care Act (ACA) was created as an insurance cover for millions of uninsured Americans. ACA expanded Medicaid eligibility and came up with increased regulations for insurance companies. Medicaid’s eligibility threshold for adults was expanded to 133% of the federal poverty line (McKenna et al., 2018). ACA also provided federal tax credits to help reduce Americans’ insurance premiums in the income bracket of 100% to 400% of the federal poverty line (Price & Saltzman, 2013). ACA provisions also prevented insurers from denying access to healthcare for individuals with pre-existing conditions. Under ACA, low-income families qualified for extra savings through and cost-sharing reductions meant to lower insurance costs. Premium tax credits also reduced the monthly health insurance bill to reduce the out-of-pocket maximum. The ACA health insurance plan covered all essential benefits from ambulatory service, family planning to mental health, and substance abuse disorders. ACA also mandated other health insurers to cover preventive services at no cost, including checkups, vaccination, and health screening. With the implementation of ACA, states could extend Medicaid coverage to include more people. 

America’s healthcare system is the most expensive globally, and with the passage of ACA, the question was how the government would fund ACA. Healthcare is expensive, and it does not abide by the conventional supply and demand curve. The government plays a significant role as it is responsible for 43% of healthcare spending (Sommers et al., 2015). Other Americans use employer health insurance or private insurance to cover their health expenditure. The American Congressional Budget Office (CBO) estimated the ACA implementation cost at $1.363 billion from 2014 to 2023 (Price & Saltzman, 2013). The government came up with new sources of revenue to fund ACA. The government increased taxes for the wealthy such that families with more than $250,000 annual income will pay 3.8% Medicare payroll taxes. 

As of 2014, health insurers paid an annual fee to the government, depending on the number of net premiums written. Net premiums written protects the insurer from significant financial loss. The government would also charge on medical devices, indoor tanning, branded prescription drugs, and high-cost insurance plans (Sommers et al., 2015). The excise taxes would contribute a considerable amount to ACA. Additionally, ACA required all Americans to be under an insurance cover. Individuals who did not qualify for ACA because they make more income were required to pay for comprehensive cover. The private insurance market was changed to be like the traditional employer-based policy where young and old workers are under the same coverage and pay the same premium. Young, healthy Americans were required to pay more in premium as they will utilize it as they get older to funding ACA. 

Economic Impact of ACA 

Economists are still divided on the economic effects of ACA. The bill was created to overhaul the healthcare system, but it would have a lasting impact on the economy and the healthcare system. The additional funding spent on ACA, and healthcare does not take place in a vacuum. The spending on ACA has a ripple effect on the healthcare system and the economy in general. ACA has a multiplier effect that will affect different healthcare sector stakeholders from providers, insurers, and suppliers. A lot of planning went into financing ACA, and it affects many stakeholders. Different economic models were used to predict the economic impact of ACA. Some models were not as optimistic as the Obama administration models to push for the passage of ACA in Congress. Nell & Campbell (2010) used dynamic simulation to show that the high initial costs for implementing ACA were not an investment that would pay off in the long run. The high cost would slow the economic growth leading to high inflation and interest rates. Critics of ACA were worried that the taxes, fees imposed on investors and businesses would reduce investment in the economy, leading to a decline in productivity. Nell & Campbell (2010) predicted that the economy would decline by $706 billion. A smaller economic pie implies lower wages and higher taxation. However, this prediction was incorrect as the economy experienced steady growth from the third quarter of 2009 to the third quarter of 2015. Within that period, approximately 14 million jobs were added to the economy. The unemployment rate dropped from 9.9% in 2009 to 5% in 2015, and the 2014-2015 period had the fastest employment growth since the 1990s (Schoen, 2015). Inflation-adjusted economic growth was higher than that of other high-income nations. The positive economic indications were signs that ACA did not hurt the country’s economy, as some economists had predicted. 

A report by the Manhattan Institute (2016) explored how some of the ACA’s disincentives had adversely affected the economy. The employer penalty became effective in 2015, and it costs $275 for every full-time employee every month for businesses that do not offer ACA-approved health insurance. The $275 monthly disincentive for employing full-time employees and small businesses were discouraged from growing. Businesses are careful not to add more employees as having more than 50 employees qualifies them as large businesses. Large businesses pay $5,500 in a monthly penalty when they do not offer ACA-approved health insurance to their employees. The report adds that disincentives affected the pace of economic growth. In 2012-2013, the economic growth did not achieve the historical average by 0.6% per year, and the GDP reduced by $170 billion in 2015. Economic analysts attributed the slow growth to many factors, including the incentive changes that were adopted after ACA. 

Economic Impact on the Insurance Industry 

It is hard to predict the specific impact on the economy, as many other factors are at play. However, ACA’s effects on the health insurance sector, providers, and reimbursement are easier to determine. Since ACA’s passage, the insurance premiums, deductibles, and out-of-pocket costs have increased, particularly for plans on the health insurance exchanges. Health insurance exchanges are the public health insurance exchanges under ACA. The Gold Plans experienced a 13.8% increase in monthly premium in 2016, while Silver Plans increased by 11.3%. The Bronze Plan also increased by 12.6%, and the members under these health plans that were not receiving federal tax subsidies were subjected to higher monthly premiums (Dugan et al., 2019). The deductibles cost has significantly increased in individual states, including South Carolina, Washington, and Mississippi. Health insurance rates have gone up since ACA, yet ACA was supposed to make healthcare affordable. ACA mandates insurers to cover everyone, including the sickest populations. Insurers have increased the premiums due to the increasing cost after the pre-existing conditions clause was abolished. Insurers are required to cover expenses for some of the most expensive patients. Offering preventative services has also increased the operating costs for insurers. 

The doomsday predictions that ACA would kill the insurance industry did not materialize. Insurance companies were preoccupied with what could go wrong under ACA. However, insurance companies experienced an influx of many new clients. Many Americans had access to government-subsidized premiums that they used to pay insurers. A more significant percentage of young, healthy Americans who had not bothered with health insurance was now mandated to seek health insurance. The government subsidies made it easy to buy private insurance plans for individuals who did not qualify for expanded Medicaid services. 

Impact on Providers 

The impact of ACA on healthcare providers is also significant. Under ACA, approximately 20 million previously uninsured Americans gained health insurance. Providers faced an increase in the demand for services for primary and specialty care in community health centers and large healthcare systems. Patients who only used healthcare services for acute care began seeking preventative services and chronic conditions management after ACA. More people went in for screening, and there was an increase in demand for diabetes services. For safety-net providers, the changes were quite significant. The total number of patients increased, and there was a shift in the payer mix. Medicaid expansion changed the payer mix significantly, but it gave providers the much-needed capacity and funds to meet the increasing demand. 

A study by Dugan et al. (2019), ACA increased insurance coverage, and many hospitals received more reimbursement per patient compared to before ACA. Studies continue to explore the impact of ACA on hospitals, and they found that hospitals that served a higher proportion of uninsured patients saw a tremendous increase in the reimbursement in comparison. The studies show that the patient profile does not change drastically, but Medicaid expansion replaced self-pay and county safety net programs. Safety net hospitals that served uninsured patients experienced a drastic increase in revenue. Dugan et al. (2019) found that hospitals with high un-insurance from 2008 experienced a 2% increase in total revenue in 2014-2017 due to the Medicaid expansion. Safety net hospitals enjoyed a 4% increase in total revenue. The effects were similar across the city, county, and district-owned hospitals. The city, county, and district-owned hospitals attended to the most significant share of uninsured patients before ACA, thus increasing annual revenue. Private hospitals experienced a slight decline in revenue as they no longer had access to a large share of self-pay and county indigent patients. Dugan et al. (2018) add the increase in revenue was not directly related to improvement in quality or additional capital spending. 

ACA’s primary mandate was to increase health insurance cover, but some of the provisions were meant to improve quality. One component of ACA was giving bonuses to hospitals that managed to reduce care while meeting their targets. ACA encouraged hospitals to reduce visits, readmissions, or procedures through a shared-savings approach. The Hospital Readmission Program has been described as a success as hospitals have achieved 1-4% cost reductions, which are shared savings bonuses paid to the providers at the end of the year. Proponents of ACA cited that federal spending in healthcare would reduce in the long run as the government would put measures to enhance efficiency. Before ACA, the Medicare Advantage (MA) payment was 14% higher than the cost used to cover other beneficiaries in the traditional Medicare program. ACA came up with a new benchmark strategy to reduce MA payment and incentive bonus payments to providers with high-quality ratings. 

Impact on payment/ Reimbursement 

ACA had predicted savings of up to $136 billion over ten years (2010-2019) through the payment strategy (Schoen, 2015). There are no official records on how much money has been saved, but reductions in reimbursement to managed care have saved the federal government a lot of money. ACA reduced updates in Medicare payment levels to different healthcare providers. The CBO estimated that the government would save approximately $52 billion annually from cuts to Medicare reimbursements. ACA has other planned reimbursement cuts that may not be fully implemented because the Trump administration plans to repeal ACA. Provisions such as the Biologic Price Competition and Innovation Act would have contributed to $7 billion in savings if implemented. 

ACA has a significant effect on reimbursement. Since the adoption of ACA, many Americans opted for a high-deductible plan; this has caused out of pocket expenses to drastically increase. Providers are finding it hard to collect out-of-pocket expenses fully, and they often collect 50-70% after the patient’s visit (McKenna et al., 2018). Patients are buying high-deductible plans with lower premiums to control costs. Uncompensated care declined, and this increased hospital profitability by 35% since 2015. ACA has decreased charity care, and bad debt as the patients under ACA can now pay for medical services compared to the pre-ACA era. A study by the Kaiser Family Foundation found that uncompensated care costs were reduced by approximately $6 billion in 2014, particularly in the Medicaid expansion states (McKenna et al., 2018). However, the increasing volume of reimbursement was found to be lower than the hospital cost. In some cases, Medicaid reimbursement declined with ACA because of the adoption of the fee-for-service model. CMS came up with a value-based payment to encourage quality and affordable care, rather than volume. Providers in the value-based payment plans face CMS penalties through the Value Modifier Program for not meeting the quality measures such as the Hospital Readmission Reduction Program. 

Impact on State Economy 

The concern about the cost of expanding Medicaid eligibility is a reason some states refused to implement ACA. The states were given the power to set the income eligibility levels as ACA is funded by the federal government and the state government. The federal government funded ACA fully until 2016 to cover the initial high cost of enrolling new members. After 2016, the federal government spending reduced to 93% in 2017 and 90% in 2020, implying that the state covers the remaining 10% (Dugan et al., 2019). Under ACA, the states only pay 10% to compare to the pre-ACA era when states contributed between 25-50% for Medicaid enrollees. In 2020, 35 states have implemented Medicaid expansion. One reason for implementing Medicaid expansion is that ACA enables states to save by moving adults in state-funded health programs to the federally funded program. Expanding Medicaid also helped the states to reduce its spending on uncompensated care for uninsured individuals. 

Medicaid expansion is quite useful in the age of Covid-19. Economists predict a recession in 2021 due to the public health and economic crises in 2020. The unemployment rate will peak at 14% by the end of 2020, as over 27 million Americans have lost their jobs. Individuals who have lost their jobs and employer-based health insurance due to Covid-19 are likely to qualify for Medicaid unless they are in non-expansion states. However, many Americans will fall into the “coverage gap” where they are not eligible for Medicaid because their income is too low for marketplace coverage. 

Conclusion 

ACA affirmed the government’s commitment to providing affordable health insurance to Americans. Implementation of ACA was costly, and the government sought finances from different sources. The government was not only committed to improving access to healthcare but improving quality through the many ACA provisions. The impact of ACA on the economy is widespread, and patients, providers, insurers, and state governments have been affected. ACA has increased the number of insured Americans while bringing notable positive effects to the economy, such as increased employment in the health sector, increased reimbursement, and savings for the states enrolled. Some of the adverse effects of ACA include the rising cost of insurance premiums that should be addressed to make ACA sustainable in the long-term. 

References 

Duggan, M., Gupta, A., & Jackson, E. (2019).  The Impact of the Affordable Care Act: Evidence from California's Hospital Sector  (No. w25488). National Bureau of Economic Research. 

McKenna, R. M., Langellier, B. A., Alcalá, H. E., Roby, D. H., Grande, D. T., & Ortega, A. N. (2018). The Affordable Care Act attenuates financial strain according to poverty level.  INQUIRY: The Journal of Health Care Organization, Provision, and Financing ,  55 , 0046958018790164. 

Price, C. C., & Saltzman, E. (2013). The economic impact of the Affordable Care Act on Arkansas.  Rand health quarterly ,  3 (1). 

Schoen, C. (2015). The Affordable Care Act and the US Economy: A Five-Year Perspective (The Commonwealth Fund, Feb. 2016); M. Buntin,“Spending Growth Trends: Keeping an Eye on Spending per Person,”.  Health Affairs Blog . 

Sommers, B. D., Gunja, M. Z., Finegold, K., & Musco, T. (2015). Changes in self-reported insurance coverage, access to care, and health under the Affordable Care Act.  Jama ,  314 (4), 366-374.