The Economic Effects of the Patient Protection and Affordable Care Act

The Economic Effects of the Patient Protection and Affordable Care Act

On March 23rd, 2010, President Barack Obama signed into law the single largest piece of health care legislation since the creation of Medicare and Medicaid in 1965. The Patient Protection and Affordable Care Act (ACA) was created to increase the percentage of Americans with health insurance coverage and reduce the overall costs of health care. There has not been broad support of this legislation. Many Republicans feel that it greatly expands the role of the federal government in the health care industry and will increase federal spending and the deficit over the long-run. However, it remains to be seen what economic effects this legislation will have on the U.S. economy has much of it has not taken effect yet. How this legislation transforms health care over the long-run will determine the economic outcome of it.

The Economics of the Health Care Industry

Health care is a unique industry compared to many other industries. It has been referred to as a quasi-market because it does not follow the free market model like many other industries. In free markets, you have buyers and sellers who act independent of each other. If the health care industry were truly a free market, patients would be able to choose services from any provider. Health care providers would not be able to fix prices because they would be dictated by the interaction between the availability of providers versus the quantity of services demanded by patients. However, in the health care industry you have an intermediary which is health insurance which dictates the availability of providers to patients. In addition, prices are negotiated between payers (typically insurance companies) and providers. The health care industry does not allow the "invisible hand" described by Adam Smith to move supply and demand toward its natural equilibrium.

Health insurance which is typically acquired through employer benefits also insulates patients from the true costs of health care which creates a moral hazard. Patients utilize health care services to a greater extent because they do no have bear the full cost of services provided to them. When patients compare the opportunity costs of whether to seek health care services, they do not appreciate the true costs that they are sacrificing in order to receive the care that they are receiving. As a result, patients with health insurance are maximizing the utilization of their benefits which is leading to health care costs rising faster than total economic output as seen in Figure (xx) (Cite).

The U.S. health care system is also a multiple payer system which has created inefficiencies in the system along with excessive administrative costs. In addition, advancements in technology and services have led to rising health care costs. Legal risks are also a cost driver which leads providers to practice defensive medicine which leads to provider induced demand for health care services. The U.S. health care system is also dominated by costlier specialty care rather than primary care which drives up health care costs.

On the other hand, not everyone has access to basic health care because of the cost and the absence of health insurance. In 2010, when the ACA was enacted, it was estimated that 50.7 million Americans were without health insurance (Cite). However, these individuals still create a cost to the system because they utilize emergency care services more than individuals with insurance. This resulted in approximately $56 billion in uncompensated care in 2008 (Cite). Many of these individuals do not have health insurance because they are not offered health insurance through their employer and cannot afford it in the private market.

As a result of these issues and many others not described here, the U.S. spends the most amount of money on health care in the world as seen Figures 2 (Cite). Back in 2000, the World Health Organization ranked the health care systems of all of its members, and the U.S. ranked 37th despite having the spending the most money per capita (Cite). This indicates that the health care system broken which is why politicians have been arguing for years over ways to fix it. In 1993, President Bill Clinton tried to push health care reform through Congress. However, the legislation never received the support it needed for passage and was ultimately declared dead in September of 1994.

Now Is the Time for Healthcare Reform

In November of 2008, Barack Obama was elected the 44th President of the United States. He had campaigned heavily for health care reform. With a democratically controlled Congress, he was able push through the most comprehensive health care legislations since the 1960s. It was not without challenges and compromises. In the end, the ACA was passed, and with it came some of the following provisions (Cite):

* Outlawing the denial of health insurance coverage as a result of a patient having pre-existing conditions.

* A sliding scale tax credit for small firms (fewer than 25 employees) in order to encourage them to offer employer sponsored health insurance.

* States have to develop health insurance exchanges through which non-group individuals can purchase health insurance on the open market.

* Expansion of Medicaid to coverage individual up to 133% of the Federal Poverty Level (FLP) and premium subsidies for individuals with incomes up to 400% of the FPL.

* Employer mandate to offer health insurance coverage to employees in firms with 50 or more employees or pay a free rider tax.

* Individual mandate which requires individuals to carry health insurance coverage or face a penalty of $625 or 2.5% of income.

Many of these provisions will be phased in over this decade. According to the Congressional Budget Office (CBO), the ACA is expected to reduce the number of uninsured by 32 million by 2019 (Cite). There will still be 23 million individuals uninsured despite this legislation.

One of the most controversial provisions of the ACA is the minimum coverage requirement--also known as the individual mandate. Under Title 1, Subtitle F, Section 5000A, "Shared Responsibility for Health Care", the Individual Responsibility Requirement states that, beginning in January 1, 2014, individuals will be required to "maintain minimal essential health care coverage."(Washington Post 2010) Any individual who does not acquire a qualifying minimum insurance coverage will incur a tax penalty. This provision is meant to compliment two other provisions of the health law which also help