The Health Economics of the Affordable Care Act
October 01, 2015
By Emily Zhen, C’18, W’18
Affirmed in part and reserved in part, the individual mandate was ruled legally permissible if treated as a tax. However, it was ruled unconstitutional to force states to undergo Medicaid expansion. Meanwhile, the King v. Burwell decision on June 25, 2015 declared it constitutional for states with federally operated exchanges to issue insurance subsidies. The 6-3 ruling allows the federal government to grant subsidies to all 50 states, whether or not the state or federal government operates the exchanges.
Measuring the Implications of the ACA
Given the controversial nature of the ACA, it is important to analyze the health economics and impacts of the law. The health care industry plays a dominant role in the United States economy. According to the Congressional Budget Office (CBO), the U.S. currently spends 17 percent of its gross domestic product (GDP) on health care alone, more than any other nation in the world (Figure 1). Furthermore, the rate of health care spending growth is faster than the rate of growth of the overall economy. If no changes are made to the existing system, by 2080, health care spending is projected to account for 40 percent of the U.S. economy. The following sections detail more specific implications of the act.
Figure 1: U.S. Health Care Spending as Percentage of GDP Compared To Other Developed Countries, Source: Organization for Economic Cooperation and Development
The ACA Is Lowering the Uninsured Rate, But At a Cost to Some
Several groups have attempted to quantify the impact and implications of the ACA to analyze its effectiveness, benefits, and costs. The ACA makes insurance more affordable to low-income individuals, but this may come at a cost to certain high-earners, employers, and health care providers. A recent analysis by the Department of Health and Human Services reveals that the reform has indeed helped insure previously uninsured Americans. An estimated 16.4 million people have gained coverage due to the ACA since the end of 2013, including children remaining on a parent’s plan until age 26. As seen in Figure 2, the uninsured portion of the U.S. population has dropped from almost 15 percent to nearly 10 percent. As of 2014, the ACA offers premium subsidies for Americans with income between 100% - 400% of the federal poverty level (FPL) and cost-sharing subsidies for Americans with income less than 250% of the FPL.
However, in order to provide affordable, high-quality health insurance, high-earners and health care providers have to pay new taxes under the Cadillac Tax, the individual mandate, and the employer mandate, which requires firms with 100+ workers to provide employee insurance or else pay penalties after 2015. The employer mandate has led to unintended consequences. To meet the requirements of the employer mandate, some businesses have started cutting employee hours to lower operation costs.
Figure 2: Percent of Uninsured Population, Source: www.whitehouse.gov
The ACA & Economic Growth in the Health Care Industry
In addition to assisting the uninsured population, the ACA has helped accelerate the economic recovery in the health care industry. The reform has increased families’ demand for health care goods and services and reduced families’ out-of-pocket medical costs, thus allowing them to invest the extra disposable income into other areas of the economy. In fact, health care services employment has increased rapidly since 2014 – the Council of Economic Advisers estimates that the expanded coverage the ACA offers has created 130,000 jobs in health care alone. As seen in Figure 3, health care services employment has risen steadily since 2014.
Some economists point out that the ACA has introduced a flood of newly insured patients into the health care market, creating a system overload for the current shortage of primary care physicians and specialists. Additionally, insurers are not allowed to deny patients due to pre-existing conditions under the ACA, which may introduce a wave of sicker patients into the insured population and cause insurance premiums to increase. It is difficult to measure the direct effects of the ACA on the overall economy.
Figure 3: Change in Health Care Services Employment Over Time, source: whitehouse.gov
The ACA & Health Care Costs
Another goal of the ACA was to lower the costs of health care. To curb health care spending, the ACA implemented several measures. These measures include a transition away from a fee-for-service payment model, in which doctors are paid by how many services they perform, to a value-based system model, which emphasizes quality of care over quantity of care. Meanwhile, expensive health insurance plans are now being taxed to the dismay of certain employers and high-income individuals.
Thus far, these measures have proven effective. Health care spending growth is the slowest it has ever been in nearly 50 years. In fact, the three slowest years of growth in real per capita national health expenditures were 2011, 2012, and 2013 (Figure 4). Harvard University professors David Cutler and Nikhil Sahni show that the slowed rate of health care spending is partially attributable to the ACA. It is important to note, however, that aggregate health care spending may be increasing due to the increase in the number of insured individuals entering the market.
Figure 4: Growth in Real Per Enrollee Spending by Payer, Source: www.whitehouse.gov
The ACA & The Federal Budget
The ACA entails a great amount of upfront spending, which can be problematic given the growing federal deficit and budget cuts across the government. The CBO (2010b) estimates that the ACA’s subsidies and public insurance expansion will cost $940 billion by 2019. In 2019, the CBO projects that the government will spend $214 billion to cover 32 million people, spending about $6,690 per person. However, over time, the revenue increases and spending cuts from the ACA will exceed the new level of spending and ultimately lower the federal deficit by more than $100 billion in the first decade and more than $1 trillion in the second decade. In other words, to implement the ACA, the government must spend a large sum of money now in anticipation for projected long-term savings.
The ACA is a landmark yet controversial piece of legislation that has the potential to significantly reshape the U.S. health care system. It is difficult to quantify the exact impact of the reform; however, in the 5 years since the ACA has been signed into law, it has curbed the uninsured population – allowing millions of low-income Americans to receive critical health care – helped lower health care spending growth, and created accountability for high quality health care.
Nonetheless, these benefits have come at a cost to some insurers, physicians, and high-income individuals and led the government to front the large costs of many provisions in the short-term. Despite the recent rulings by the Supreme Court, several challenges still remain for the ACA, including extending Medicaid expansion across the states, building the infrastructure for the new health insurance marketplaces, controlling health care costs, and handling the consequences of a tougher individual mandate penalty starting in 2015. The first Supreme Court ruling on the ACA declared that mandating Medicaid expansion in the states was unconstitutional; thus far, 31 states including the District of Columbia have expanded Medicaid but a handful of states are still reluctant to expand their Medicaid programs. As more individuals sign up for health insurance plans through healthcare.gov, insurers, providers, and patients alike will need to adapt to changes in premium costs and insurance plan structures. Though the rate of health care cost growth is slowing, the growth in health care spending still exceeds the inflation rate. In response to the steeper penalty associated with the individual mandate, certain individuals may push harder to contest the ACA. Moreover, insufficient knowledge of the ACA and an inability to apply that knowledge may be the single largest barrier for providers and clients alike. For instance, many uninsured individuals lack information about the ACA that would help them access quality healthcare.
Given these challenges, the future of ACA is uncertain. It is still too early to understand the complex implications of the law, and the challenges policymakers face in implementing the provisions today may change over time. If the enactment of the ACA aligns with its original vision, the reform has the potential to positively transform the American health care industry and economy overall.
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