This term paper explores the implications of the Affordable Care Act (ACA) has had on the economic strategy of health care systems in the United States. It describes the relationship of the economic model of health care, using fundamental fiscal concepts such as profit maximization, a demand curve, and cost structures, based on the enforcement of the ACA. Besides, the paper compares the basic economics of the U.S. health care before the passage of the ACA, and also after the enforcement of the ACA. The paper analyzes the implications of the adoption of the ACA under the current economic strategies of health care in the U.S. and also, reviews the projected future implications of the ACA on the economy of the country. The paper includes statistical data in estimating the plausibility of the provisions plans discussed in the ACA. The paper borrows insights from varying articles that report on the significance of the ACA on both positive and negative movements of the economy.
The Impacts of the Affordable Care Act in the U.S
The Patient Protection and Affordable Care Act is a restructured legislation focusing on the health care issues of the United States. The Healthcare Reform was signed into law by the U.S. president, Barrack Obama, on the 23rd of March 2010. Since then, the law has gained popularity via the moniker, Obamacare. Obamacare has stirred up different emotions among the citizens of the U.S. Research shows that numerous discourses were debating on the overall effectiveness of Obamacare on the people’s welfare, as well as the economy of the country. Obamacare has infused numerous implications on the economic strategy of health care in the United States (Oberlander, 2012).
Basic Economics of the US Healthcare System Pre-ACA
Before the official passage of the Affordable Care Act (ACA), on 23 March 2010, allegations about the ‘galloping costs’ of the health care system in the U.S. were very rampant in the media. According to history, the health care expenditure in the U.S. was increasing more gradually than it had at any time in the recent century. Over the past decade, immediately before the commencing of the ACA implementation, the U.S witnessed the highest gross expenditures on health care systems. Scholars argue that during that time, health insurance companies had elevated their premiums, in a bid to realize more profit margins (Kaplan, 2011).
The increment of the premium charges by health insurance firms was a strategic move deployed to maximize profits. Both the health care providers and the insurance companies capitalized on the increasing demand for healthcare services among the citizens in the U.S. The average costs incurred by the health care firms were nothing compared to the revenue accrued to the firms, perpetuated by the increasing demand for health care systems. The profitability venture, sparked by the ensuing demand, shifted the supply curve, permitting the entry of new firms into the market (Besanko, Dranove, Shanley, & Schaefer, 2010).
There are two primary reasons used to explain why the expenditure on healthcare had drastically increased. First on the list, is due to the hiked cost of new medicine, owing to the advancement in technology. Technological factors inflate the prices of medicine through the increased production costs. Technological progress has revolutionized the face of modern medicine in very significant ways. However, this advancement comes with greater responsibility in terms of production costs. Therefore, the entry of new pharmaceutical drugs into the market often results in increased costs for healthcare services and products. The U.S. is the leading global country in medical research and development; consequently, it becomes apparent why the health care systems in the country experience amplified growth (Koh & Sebelius, 2010).
Secondly, the increased wealth and stable disposable income of American citizens might have precipitated the increased costs of health care services and products. Research reveals that over 90% of the differences in per capita health care expenses between America and other countries are the result of the increased wealth and higher disposable incomes in the U.S. Consequently, most of the health insurance companies in the U.S. increase their premiums rate for coverage plans. Furthermore, it is a belief of many health care systems that most citizens can finance their healthcare costs, even after the costs are inflated (Sommers, Buchmueller, Decker, Carey, & Kronick, 2013).
Despite the high expenditure rates on health care services in the U.S., the quality of medical care systems in the country was alleged to be substandard. Scholars dismissed a report by the World Health Organization (WHO), written in the year 2000, for ranking countries depending on the quality of their health care systems. According to the report, the U.S.A. was given the 37th position out of 191 countries based on the quality of its healthcare systems. Scholars maintain that the research methodology used by WHO was critically defective.
Firstly, it used life-expectancy, as the only chief parameter to assess the quality of health, representing each Nation’s population. Life-expectancy alone contributed to 25% of the overall score of each country. Based on this parameter, the U.S. was ranked at 29th position by WHO, with an estimated average of 78 years. On detailed inspection, life-expectancy is not an independent variable. It is significantly affected by diverse factors such as mortality rates, ethnic composition, and the number of accidents, prenatal habits, and dietary lifestyle (Turner, Capretta, Miller, & Moffit, 2011).
Another 25% of the WHO ranking criteria focused on the distribution of health in each country. Under this category, the U.S. emerged as the victor by topping the list. However, there was a colossal disparity in access to healthcare services and products in the U.S. The infant death rate for blacks was double the mortality rate for whites. Additionally, over 50 million youths did not have health insurance covers. The employer-sponsored insurance system is extensively used in the U.S.
Therefore, the health of most youths is only insured by the third party's comprehensive protection, which is paid solely by the employer. As a result, the U.S government loses an estimated 250 billion dollars annually, by sacrificing public finance from health insurance in the form of payroll taxation. The medical insurance plans that employers provide to their workers are purchased with pre-tax money. In contrast, health insurance coverage outside the context of employment is purchased with post-tax money (Sommers et al., 2013).
There are two main providers of public insurance coverage in the U.S - the Medicare, and the Medicaid program. The Medicare scheme is universally geared to serving the elderly people in the U.S. who have at least sixty-five years. The Medicare insurance cover contains four sections.
- The first section offers coverage for hospital care.
- The second one includes the doctor’s visit to home-based health care, and the hospital resources are used during the trip.
- The third part gives merit to the elderly by offering them an opportunity to engage in other health plans in the private sector, rather than being constrained by the government-controlled system.
- Finally, in the last segment, coverage for various medications is highlighted.
Most people claim that Medicare and other government-controlled healthcare insurance schemes are cheaper than private health insurance plans. The Medicaid system provides insurance coverage for the poor people in the U.S., including small income children through government subsidies. As a result of these grants, research reveals that most States have sought to spread out their Medicaid schemes as a source of income. Additionally, other states have mismanaged Medicaid money by combining it with their general operating finances (Besanko et al., 2010).
Research shows that most of the small independent health firms merged with larger health care systems to gain economies of scale. There are numerous benefits accrued to the economies of scale. Firstly, the Medicaid insurance system was highly subsidized by the government; therefore, the amalgamation of health care firms attracted more subsidies from the government. The received grants greatly reduced the expenditure costs of the firms. Other benefits accrued to companies due to achieving the economies of the scale included increased production capacity, which translated into more profits being realized and enjoyed by the firms (Besanko et al., 2010).
The Expected Outcome and Purpose of the Implementation of the Affordable Care Act (ACA)
The ACA is purposed to restructure health care systems by availing more Americans affordable and quality health insurance services. The ACA provisions openly recognize the need for keen attention to health and literacy. The Act includes the provisions to communicate health, and medical information accurately; promote prevention, be patient-centered and develop new medical homes. Furthermore, the requirements of the ACA guarantee equity and cultural competence and aim at high-quality health care deliverance. The provisions are grouped into six health and medical fields in the Act, where further action may be adopted by the concerned stakeholders (Turner et al., 2011).
- Health insurance expansion: Obamacare aspired to stretch out to registering and delivering care to health insurance extension populations by 2014 and years yonder.
- Promoting Equity: Obamacare is aimed at promoting equity in health and medical services for all ethnicities and populations.
- Labor force: Obamacare envisioned training health providers on cultural competency, literacy, and language issues
- Providing patient information: The ACA targeted at ensuring patient information is provided at the appropriate reading level.
- Public health welfare: The ACA was committed to investing in public health, for all calibers of people, inclusive of illegal immigrants and people earning revenue that is below the poverty limit.
- Quality improvement: The ACA planned to upgrade the quality of health care through innovation. It targeted to establish research institutes to work around the clock, in devising drugs to combat chronic diseases prevalent among the American population.
However, people with soaring levels of health literacy, are most prepared to gain from Obamacare. Research shows that the prevalence of low health literacy is excessively elevated, among lower-income citizens qualifying for government-subsidized care via Medicaid or Medicare. The ACA aimed at enhancing health literacy levels among lower-income citizens to increase the eligibility for insurance health care by the year 2014.
The ACA also intended to develop homogeneous insurance coverage documents, so that Americans can efficiently compare different insurance policy plans. In the old times, there were no consistent systems displaying benefits included in an insurance plan. Currently, a straightforward uniform manuscript makes the comparison of insurance alternatives very easy. Furthermore, the lowest standards are laid down for insurance in the non-group and small group markets. While most of these reforms are perceived by other people with admiration, experts argue that their lifespan will be short-lived.
In particular, supposing individuals are assured of access to insurance that is free of health status, then; many people might take advantage by remaining uninsured to evade paying premiums. Most would only wait until they fall sick to purchase premiums at average prices. In light of these circumstances, the insurance companies will be compelled to charge high premiums to everyone to account for the fact that the pool importing insurance is sicker than the rest. Consequently, the continuous cycle of such events could lead to high prices of insurance premiums, and eventually an unsuccessful insurance market (Sommers et al., 2013).
The ACA provisions have introduced a prerequisite that individuals in the U.S. should purchase insurance. People living in the U.S are required to have insurance coverage, or else they face penalty charges. The setback with the individual mandate is that it may prove impossible and inadvisable to enforce, supposing the insurance is not affordable. This predicament stimulates the third leg of the stool – the introduction of increased government subsidies to make insurance affordable for lower-income families. The government subsidies come in two forms under the ACA.
The first form is an extension of the Medicaid program to cover all people with incomes below 133% of the poverty line. This extension benefits an individual who earns less than $10,830, and a family of four, which makes less than $ 22,050 (Oberlander, 2012). The second form is the availability of tax credits to offset the expenditure of private non-group insurance. The tax credits are designed to limit the share of revenue that individuals have to incur to get insurance.
The tax credits start with a limit of 3% of income at 133% of the poverty line, then elevate to a limit of 9.5% of revenue at 300% of the poverty level (Foster, 2010). Moreover, supposing the individuals who have incomes below the threshold for income tax filing, or if, the cheapest insurance option availed to them costs more than 8% of their total revenue, such persons are exempted from the mandate penalty (Sommers et al., 2013).
There are six sources of finance that the ACA uses to fund government subsidies. Firstly, reductions in reimbursements made to private ‘Medicare merit’ schemes offer an alternative to the administration of Medicare programs for the elderly. The total percentage of funds from this initiative amounts to 14%. Another 33% is obtained from subsidies provided annually to hospitals for their compensation under Medicare (Oberlander, 2012). Furthermore, the increased payroll taxes by 0.9% under Medicare and the expansion of the tax to capital revenue. Tax on capital income is levied on individuals living singly with incomes of more than $200,000 annually (Foster, 2010). The tax is similarly imposed on families with annual income exceeding $250,000. The total percentage of funds from this initiative amounts to 21% (Foster, 2010).
Additionally, the government fishes out taxes from various sectors anticipated profiting from the expanded coverage of medical expenditure in the U.S. Such areas are inclusive of insurance companies, pharmaceuticals, and drug manufacturers. These sectors contribute to a total of 11% in funding the government subsidies (Oberlander, 2012).
Besides, the government is expected to impose a tax called the ‘Cadillac tax’ on insurance commodities whose costs exceed $10,200 in the case of an individual or $27,500 in the event of a family by 2018. Lastly, other income sources are from miscellaneous sources such as penalty payments by people, and taxes on higher salaries or wages that are owing to reduced employer spending on insurance. Such incomes amount to 21% of the funds required to finance the government subsidies (Besanko et al., 2010).
The ACA also provides several provisions to deal with the problem of ‘galloping health costs’ in the U.S.
- On top of the list is the Cadillac tax, which is expected to reduce the demand for health care through the reduction of medical insurance plans.
- Secondly, both non-group and small group health insurance companies must compete transparently and charge lower premiums to get a competitive advantage.
- The third provision entails the re-designing of compensation subsidies of health care providers under Medicare to minimize costs and guarantee quality.
- Fourthly, the government has allocated adequate funds to the development of a new research center, to study the relative efficiency of medical treatments. Through the analysis, the government will identify which treatments are the most cost-friendly yet efficient.
- Finally, the ACA provides incentives for financing community health centers that are calculated to serve refugees not covered by the reformed Act.
There are many more provisions in the ACA; however, it is better to familiarize yourself with the most important provisions that aim to reduce health care expenditure costs (Foster, 2010).
The Impact that Is Expected on the Economics of the US Healthcare System
Obamacare is supposed to stimulate various repercussions on the economy of healthcare systems in the U.S. According to Foster, (2010), the ACA provisions that are aimed at escalating the health insurance plans are projected to cost $828 billion by the end of the financial year of 2019. The most significant of the ACA provisions that are anticipated to have a major impact on the economy of the U.S. is the expansion of Medicaid eligibility to all Americans with lower income brackets. This extension alone is estimated to cause an increase of $410 billion in the cumulative Medicaid expenditures by the fiscal year of 2019 (Oberlander, 2012).
In terms of percentages, the relative percentage rise of Medicaid is approximated to be 8%. By the year 2019, the mandatory insurance cover, tied with Medicaid extension, is projected to reduce the number of uninsured people from about 57 million to a probable 23 million (Foster, 2010). The U.S. will require an additional $28 billion for extra funding of the community health insurance program (Besanko et al., 2010).
It is estimated that the total national health expenditures and ACA expenditures would escalate by a sum of $ 940 billion by the year 2019. The government is expected to spend $ 214 billion to cover over 32 million people. Per capita expenditure of the government is projected to be $6,690 per individual (Foster, 2010). Statistical experts have estimated that revenues are anticipated to increase and expense cuts anticipate exceeding the new level of expenditure. It is estimated that ACA will be successful in reducing the government’s deficit beyond $100 billion during the first decade.
During the second decade, it is projected that the government will reduce its balance deficit beyond $1 trillion. On a much detailed inspection, there is an anticipation of amplified utilization of healthcare services by persons who are newly covered or those individuals who are having more inclusive coverage. The ACA is expected to alleviate the spending on health providers, due to the extensive coverage of Medicaid. Consequently, medical providers should expect to be paid lower prices for administering their services. However, the future remains uncertain; therefore, the future implications of the ACA are only projections and not confirmed (Koh & Sebelius, 2010).
The ACA institutes the Exchange premium subsidies from 2014 through 2018 in such a way that the minimized premiums amounts paid by people with revenues amounting to 400% of the federal poverty limit would sustain the same share of premiums over time. Consequently, the government’s insurance subsidies for an eligible person would increase at the same rate as per capita health care expenditures during this timeframe.
The U.S. spending on health care is very high, but the basis of significant concern, however, is the increasing rate of medical costs, not its level, that eventually establishes the U.S financial welfare. The ACA will boost medical costs somehow; its increment implication on expenditure is expected to decrease over time. The declining estimation means that by the second decade the Obamacare will indeed minimize the national health spending (Besanko et al., 2010).
The ACA is inclusive of provisions that are intended to control health care charges and to alter the overall trend in increasing health expenditures. Some Medicare provisions would have a significant impact mostly on the level of expenses. For instance, insurance companies would cut down on expenditure costs in benchmarking processes. Other provisions would have a consequence on expenditure intensification rates.
For example, the productivity modification to Medicare payment information for classes of providers would reduce overall Medicare charges growth by approximately 0.7% annually (Oberlander, 2012). The Independent Payment Advisory Board will be obliged to regularly present recommendations reports to Congress and the president concerning methods of alleviating the growth of private health care systems. Another provision that would be inclined to moderate health care expenditure rates is the excise tax on high-cost employer-sponsored health care premiums (Koh & Sebelius, 2010).
What Impact Has Been Experienced in the Economics of US Healthcare since Passing ACA in 2010?
The U.S. market structures have witnessed various effects since the enforcement of ACA.
Perfect competition: This market situation is characterized by many buyers and sellers and has a perfectly elastic demand curve. There is no prohibition on the entry and exit of firms into the market. In this market structure, products are homogeneous such that consumer competition is limited to the quality of services and outputs. Each firm under this structure aims to maximize profits while minimizing costs. Obamacare has affected the perfect competition market structure in the following ways: It has introduced new taxes, which are imposed to raise capital, for financing the provisions, stipulated in the Act. Employers in America are obliged to honor both the individual mandate and employer mandate in agreement with the law. Research demonstrates that most people end up paying taxes in the form of penalties rather than paying for the health insurance cover.
In the year 2013, about 2.3% of the total costs incurred by most drug manufacturers and importers were in the form of an excise tax (Oberlander, 2012). These taxes increase the production costs, which are directly shifted to the consumer of health products by drug manufacturers. Furthermore, the high taxes levied on these businesses discourage the entry of other firms into the market. Moreover, some of these companies are forced to opt for retrenchment strategies such as reducing the population of their workers to sustain their survival in the market. In extreme cases, Obamacare has forced some firms out of the market due to the heavy taxation. Consequently, many people have thus lost their jobs owing to Obamacare (Foster, 2010).
This is a market structure that is dominated by a sole seller and many buyers. Monopoly can take the form of independently controlled firms’, unified for marketing similar products. Monopolistic firms incur minimum average costs of production; control the market prices of their commodities, and, consequently, realize abnormal profits. Obamacare has monopolized both Medicaid and Medicare as the principal health insurance firms in the country. The operations of Medicaid are highly subsidized to reduce the average production costs (Kocher, Emanuel, & DeParle, 2010).
Obamacare has resulted in a low reimbursement for doctors and healthcare providers. Since the enforcement of the law, physicians have experienced declining compensation rates, based on Medicare and Medicaid. The ACA has diminished the trends of hospitals, buying independent physician practices for vertical integration (Besanko et al., 2010).
This market form has intertwined features of both the monopoly and the perfect competition structure. The sellers produce similar but differentiated products. Obamacare has reinforced monopolistic competition market structure through the following ways: The provisions of the ACA demand services from only two health insurance firms (Besanko et al., 2010). The ACA intended to improve health insurance in four significant ways.
- The first one is the individual mandate in Obamacare required all people to obtain eligibility or approved coverage.
- Secondly, the employer mandate in the ACA demands coverage for employees in businesses with more than 50 workers.
- Thirdly, through regional exchanges, the ACA permits people and small enterprises to purchase health insurance premiums of varying expenditure and benefits.
- Lastly, through the extension of Medicaid’s eligibility to all individuals up to 133% of the government’s poverty limit, the ACA seeks to widen the range and affordability of the insurance health care.
The ACA also planned to launch a website portal to facilitate the interaction of health insurance exchanges with individuals and businesses. The portal is envisioned to offer qualifying guidelines for Medicaid, Medicare, CHIP, and high-risk premiums (Oberlander, 2012).
Furthermore, Obamacare has resulted in an economic disparity between different parts of the country. For instance, doctors in California are paid 30% lower wages than the other areas of the country. Another implication of Obamacare is that it has led to the loss of many jobs. Some workers have deliberately reduced their working hours while others have less morale to work at all. Most workers argue that the insurance subsidies become harsh as the income bracket increases (Oberlander, 2012).
Lastly, the workers’ health benefits became more expensive owing to the implementation of Obamacare. Workers with lower income levels can end up getting enhanced value throughout the market, however, having employer–sponsored health insurance implies that they can not obtain expense assistance. The youth tends to be energetic, and thus, does not require insurance as often as older people. In contrast, because of the small premiums, and the importance of having a health insurance plan, the younger population gets the best deal under Obamacare. This privilege ought to be extended to elderly people who are more likely to suffer illnesses occasionally (Foster, 2010).
Despite the major drawbacks of Obamacare concerning the economy of the U.S, it also has several positive outcomes for the economy. Firstly, through the Obamacare Medicaid expansion initiative, millions of Americans who were previously uninsured will gain access to enhanced quality health coverage. The biggest benefit accrued to people by Obamacare is that it minimizes the overall health care expenditure. It avails free preventive care before the need for expensive emergency service is required (Kocher et al., 2010).
Secondly, Obamacare demands all insurance plan to cover the ten indispensable health benefits including treatment and care of mental health, chronic diseases, and addiction. Most of these patients end up in emergency rooms whenever they lack access to cheap health care. Another benefit to the health insurance companies is that parents can include their children in their health coverage plans. The insurance companies take advantage of this setup since they get more premiums without higher costs on the children. Children are typically healthy and energetic; thus insurance companies need not worry about their cases. The government also supports businesses with more than 50 employees by offering tax credits to assist with the costs (Besanko et al., 2010).
The passing of the ACA has had various implications on the current economic strategies of health care such as increasing the number of medical homes and Accountable Care Organizations. Obamacare has implemented several cost reduction measures that have since alleviated health care costs. Additionally, Medicaid expansion has accommodated up to 15.9 million people, who would otherwise not receive medication, since they were below the 138% of the poverty level.
What is more, Accountable Care Organizations such as the Community Health Insurance program have also seen expansion over the years, to cover up to 9 million children? Moreover, Medicare and medical homes for elderly people have improved the quality of their services immensely. The ACA eliminates reckless spending and mitigates fraudster cases from health providers by offering free preventive care services (Koh & Sebelius, 2010).
In conclusion, this term paper has discussed the relevance of Obamacare, as perceived from the socio-economic implications it has manifested or anticipated to reveal in the future. Obamacare is a transformative law that, if fully implemented, will redesign the U.S. health care system in the future. The extent to which the ACA will go in reducing health care costs is uncertain. However, from a financial standpoint, most of the benefits targeted by the ACA will be realized in the future; therefore financing the ACA provisions will compromise the current economic status of the country. Thus, the major question remains whether Obamacare is worth the financial support.
ACA Affordable Care Act
WHO World Health Organization
ESI Employee’s Sponsored Insurance
CHIP Community Health Insurance Program
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