• <div class="header-image" style="background-image: url(/live/image/gid/4/2635_V6N3_Header.rev.1522162449.jpg);">​</div><div class="header-background-color"/>

The Health Economics of the Affordable Care Act

October 01, 2015
Ever since its passage in 2010, the Patient Protection and Affordable Care Act (ACA) has been one of the largest sources of partisan debate in Washington. In the span of five years, major provisions of the ACA have been upheld by the Supreme Court twice, in National Federation of Independent Business (NFIB) v. Sebelius in 2012 and King v. Burwell this past June. The NFIB v. Sebelius case (5-4) addressed the constitutionality of the individual mandate, requiring individuals to have insurance or pay a penalty.

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.

Percent of Population Without Health Insurance 

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.

Change in Health-Care Services Employment 

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.

Growth in Real Per Enrollee Spending by Payer 

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. 

Conclusion

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.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>