First, it’s useful to think about a couple of background matters. People talk a lot about markets, and markets versus the government, and love to throw around these terms in the healthcare sector. But we should be careful. Markets create wealth with sometimes stunning efficiency. But this can only be expected as you get close to a “perfect” market. While none is perfect, many are close enough to perfect to produce a lot of growth and wealth and make a lot of people better off. But many sectors have what are called “market failures.” That’s not a term for some sort of collapse where the world falls into a recession. It simply means that there is some reason(s) that the sector does not behave according to market forces. When they don’t, the magic of markets goes away or falls short and consumers and investors will, as a whole, end up worse off than they would be if the market did function. Economists have documented the reasons for these market failures for several decades, and there are often well known ways to address these. Usually the best way to address serious market failures is through government regulation. This is actually not a controversial statement in most economics circles. The controversy among conservative and progressive economists is not whether there should be regulation in such cases—it’s about how bad the market failure needs to be before government intervention is appropriate and effective. Progressives want to intervene earlier, whereas conservatives will tend to think the likelihood of it getting botched means we should be more conservative about intervention. But both will support it in some cases.
One of those cases in Healthcare. The American healthcare sector is a classic example of a market failure. It fails to function like a market for many reasons. Conservative and Progressive economists have both provided lots of ideas about how to reform it—those from both sides have come up with ingenious ideas to fix these deep flaws and get it working more like a market. Others have favored a single payer system, treating healthcare as a public good, like education, infrastructure or the police. Despite the horrors told by opponents of all three types (conservative and progressive pro-market solutions, or state sponsored solutions), the truth is that most of the main approaches have good arguments to recommend them. They all include tradeoffs, and a lot of uncertainties.
Now, whatever the case, we can be sure that our healthcare system is neither particularly market based, nor is it effective. It’s the most costly in the world by far. We spend the largest percentage of our economy on it, by far, despite being the richest nation. Despite it being world-class for some, its overall effectiveness lags that of other nations, and we have almost 50 million people without insurance. The ACA attempts to address some of these problems by both expanding social medicine (Medicaid) for the poor, and (somewhat) enhancing market forces through the exchanges and a variety of other means.
Now, returning to the market thing. The reasons healthcare doesn’t make for a market very easily were first documented by Kenneth Arrow (he won a Nobel and basically created the field of Healthcare Economics). He pointed out that with health care you can’t know what your needs will be and you cannot know if service you are thinking of purchasing is what you want or going to be helpful until after you have bought it (and even then, you may not know!). This makes valuing the “goods” of healthcare difficult, which is unfortunately key to a functioning market. The imbalance of information between buyers (you) and sellers (the medical system) is dramatic, which undermines market forces. The barriers to entry are high (hard to become a doctor) and set by essentially a union (doctors!), which allows them to exclude people from work that could easily be done without an MD (this is decreasing, thanks to more Nurse Practicitioners, PAs, etc., but is still a problem). In Medicine, weirdly, supply creates demand. If there are more doctors in a city, people go the doctor more. If the ratio of specialists to primary care doctors shifts in a city, so does the number of visits to those kinds of doctors – and costs move with them. More hospital beds equal more hospital visits, even when the populations have the same level of health—with no better outcomes. This may have something to do with the nature of the relationship between the patient and the physician (one of trust, rather than sales). In any case, this thing I’m describing is called “physician induced demand.” Supply doesn’t just create demand out of thin air in a functioning market, and it is another reason this sector performs poorly. And since we have “fee for service medicine” (where we pay a fee based on whatever the doctors decide to do, rather than, say, on what it should cost an average person like us to get treatment), the bill keeps growing. The fact that third parties (insurers) pay for our regular needs is also extremely weird, and not as normal in markets.
The Affordable Care Act (ACA) stems largely from the work of the MIT Professor Jonathan Gruber, one of the leading medical economists in the world. As an economist, he thought it would be valuable to propose something that extended care to the uninsured, but also largely preserved the private market, and actually enhanced market forces (the first love of any economist). His ideas formed the backbone of the policies for both “Romneycare” in Massachusetts, and “Obamacare.”
A couple items to keep in mind: The ACA is not social healthcare. It does include an expansion of Medicaid (which is social healthcare), and some improvements to Medicaid and Medicare (both government payers as well). But the act is many other things, including changes in the tax code and both pro and anti market regulation. We aren’t taking on the Canadian system, for better or for worse.
Another thing to realize is that the healthcare sector is already full of government intervention. Drugs cannot come to market unless they are deemed safe by the FDA, for instance. And employer based healthcare is one of the biggest subsidies in the tax code—something like $150 billion. The reason your employer healthcare is so (relatively!) cheap, is in part because of this subsidy. Some of the intervention is less straightforward—private insurers often actually follow Medicare’s lead on how they do their billing. It’s not intervention, but it is an example of an odd relationship between the public and private sector.
Last—before diving into the details, think about rationing. A lot of people are worried about rationing. One thing to keep in mind is that healthcare, especially quality health care, is currently rationed—by whether you can afford it, hospital capacity, whether you have a preexisting condition at the wrong time, etc. The ACA won’t increase rationing—if anything it will decrease it, since the minimum level of benefits that an insurer may offer has increased so much. But each insurer will of course be making decisions about how to spend its resources, including government insurers. These are the “death panels” people worry about. Fortunately, the government ones have to use evidence for rationing (so, don’t give people expensive care that won’t help them get better) and the private ones will surely do something similar if they want to survive. And it will decrease rationing based on wealth.
As to the act itself. First, the ACA is expanding and transforming government paid healthcare. Medicare (healthcare for the old) often sets the path that private enterprise follows when adjusting their billing practices. Medicare and the private sector are currently doing amazing things here. They are creating what is called “accountable care.” The current setup involves too much treatment because doctors want their patients to be happy (generally, and to avoid lawsuits), hospitals have a strong financial incentive to over-treat (because of fee for service medicine—they just get paid more), and patients are more satisfied when they see stuff being done. Also, in this system, prevention doesn’t pay all that well. If I have an unnecessary hospital visit, it doesn’t hurt the hospital, after all. Accountable care pushes back on this. First, it involves something called “capitation.” All that means is that Medicare takes a group of people for whom, with the right data, it can predict with great accuracy what the average cost should be to treat each person (the individual is impossible to predict). Then, Medicare says, “ok provider, here is your $100 million to treat these 10,000 people with diabetes,” If the provider runs spends more, it finally hurts the provider’s bottom line.
Medicare is also bonusing (and punishing) providers based on quality. So if a provider meets certain quality standards (say, avoiding preventable hospital infections, getting its people with high blood pressure on blood pressure medicine, etc.), it gets bonuses (or penalties, for doing a bad job). One of the key things they do is look at hospital readmissions. For a lot of sicknesses, one hospitalization is enough, but mistakes in care (particularly in follow-up-care) create more hospitalizations. This is one of the many quality measurements being used to pay hospitals. There’s actually a host of these being introduced and experimented with, many of which going under the affordable care act. The government is actually leading the way in getting the incentive right (unusual!). My assessment is that this part of the act is undeniably awesome.
There is this thing called the “donut hole” – a gap in Medicare coverage. Basically, once Grandma has used used up some of her prescription drug benefit, she reaches this spot where she starts to have to pay for all of her drugs out of pocket. This continues until she has spent quite a bit more, and her coverage kicks back in and covers her drugs (this is the part to cover “catastrophic” costs). This means high annual out of pocket costs for seniors, although often not the bankrupting sort associated with hospital bills. Still, it’s a huge problem for lots of poorer seniors. The ACA offers discounts of 50% on drugs purchased while grandma is in the donut hole, eventually covering the whole donut hole for her by 2020. It does right by our seniors, and I like that, although the added expense is a challenge.
Both Medicare and Medicaid are doing more with prevention, like expanding preventative services they cover and making it so that people are less likely to have to pay co-pays for preventative stuff. This should save money in the medium and long term. It's very good.
Medicaid is becoming available to a lot more people. Medicaid is free healthcare for the poor. As was noted in the comment string, Medicaid reimbursement rates are low. Now, many providers don't mind treating Medicaid patients, either because they still make a profit on them, or enough on others, or as a hospital they are are not-for profit. So Medicaid patients do get treated (even if not always very well). Keep in mind too, that Medicaid is run by the states (this is a Republicans favoring policy), and so experiences may vary from state to state. In any case, a large minority of small scale providers are moving away from accepting new Medicaid patients, and this will increase wait times for Medicaid patients, especially as it expands. It's not unreasonable for doctors to decide not to take Medicaid patients if they cannot make a profit doing so. But for the poor whose only other alternative is the ER, this is still a dramatic improvement.
Note also that Medicaid will not be expanding in a bunch of the states. The Supreme Court decided that federal government couldn’t make the states do so, even though the federal government is providing 90% of the funds for doing so. This means many poorer people newly covered in some states would not be covered if they lived in other states. So coverage will vary, state to state. This will leave a gap in those states that refuse the expansion—for those that cannot afford healthcare on the exchanges, but aren’t poor enough to get Medicaid. The ACA has flaws. This gap is not one of them, though. It will only be created by the states refusing it (currently all the states refusing are Republican led, and are protesting the ACA and worried about future spending requirements).
Finally, a bunch of funds will go into public health centers. These take care of the uninsured (there will still be a lot of these people).
In the private sector, the ACA does a lot of things that will both help the health care sector work more like a market. Some things will also hinder market forces, and some will do both. First, it sets up health care exchanges, with gold, silver, and bronze standards. Think of an exchange as a kind of eBay (but nowhere near as user friendly, I’m sure!). Exchanges (like stock exchanges, and eBay) where information is standardized and searchable do amazing things for markets. They help you compare apples to apples. And they make finding and comparing plans way, way easier. This lowers “transaction costs” and “search costs,” both of which make markets work better. Think about it. When you are at the airport, competition is reduced, because it is hard to find a good competitor for a Wendy’s quickly and easily. And guess what? Prices are higher. That’s because the costs associated with switching burger joints (Wendy’s to McDonalds) are higher than normal. When that happens, the burger joint can charge more (to a point). This is a simplified version of why a lack of competition hurts consumers.
Also, by setting up tiered (gold, silver, bronze) plans, and including minimum standards for the plans, the plans are easier to compare and contrast. When you can compare apples to apples, you can make “rational” decisions (which are necessary for markets to work). Before, the plans were so sprawling and complicated and different from one another. This wasn’t just because it made people happy to have a million options. Instead, it reduced competition, since it was so hard to compare the plans, even if you had the time to go out and find them all. Now you can compare, because there are a bunch of things that don’t vary, but coverage amounts do vary. This effect is pro-market.
As I said, there are certain minimums for the plans. By now, a lot of this will be familiar. If you have a dependent who is 26 or younger, (s)he can stay on your family plan. Maternity care must be covered. There are certain minimums for mental health care. No more limits on lifetime payouts, since benefit caps are the opposite of insurance (no more “we cover you if you get really sick, but not really, really sick”). There are others, and there is some flexibility on the part of states when it comes to some of them, but you get the idea. No more crappy coverage plans.
Now, as I said, standardization is pro-market, because it enhances competition. But it has an anti-market effect too. It reduces consumer choice and raises costs. You may see a headline that says “health insurance costs going up due to Obamacare.” While the exchanges make prices lower than they would be otherwise, the truth is, by saying that insurance can only be so bad, the overall average price will have to go up. This is true of any kind of consumer protection. If a company sells toasters but one in a hundred of the toasters blow up because of cheap wiring, the government might say, “you can’t use toasters with that cheap wiring in it.” Now no more blown up toasters! But no more cheap wiring—the average toaster is now more expensive. This is how minimum standards work. They raise the minimum quality, but reduce consumer choice or raise the average cost.
If your plans were identical, the exchanges should lower the cost substantially. But the details of your plan will be different, and so it will be a little hard to say whether the plans are more expensive or not. You’ll just know if you are paying more or less.
Here is where I think some of the biggest flaws of the ACA are. Having minimum standards makes sense, but the fact that my father-in-law must purchase insurance that includes maternity and pediatric child care coverage drastically raises his costs. While this does not mean that minimum standards are wrong, it does suggest that this stuff should be tinkered with substantially, lest people be forced to buy a bunch of stuff they will obviously never need. Still, that leaves us with other complex questions (like should young, fertile women have higher costs simply because they are young women?). I think few people realize is, but this is where a lot of the tradeoffs associated with the ACA are happening, and more of the debate should focus on this part. This is where it is pro-market and anti-market. This is where it sometimes helps the little guy and sometimes hurts the little guy, just like the toaster example.
The ACA also is doing a lot when it comes to measurement. Not just hospital effectiveness, as I said before, for Medicare bonuses, but physician reporting too. By putting this data into the hands of consumers, consumers will have a much better ability to makes choices among providers (again, fostering competition, pro-market). This is very, very, very good and needed.
The private sector health insurer sector famously suffers from administrative bloat. The ACA requires some simplification and standardization of billing practices that should simplify things for these payers (and the providers) and save everyone some money. It also limits how much can be spent on administrative costs at an insurance company (85% of the premiums people pay in must go to healthcare). That means more of the money will go to healthcare, and less to supporting corporate bureaucracies. (As as side note, Medicare is actually (surprisingly!) far more efficient—they spend about 3% of their money on administrative costs—this is an example of how the private sector doesn’t always present a clearly more efficient alternative, even though it usually does). Requiring simplification should help with efficiency, though, and it doesn’t look like it will hurt experimentation by the insurers. Mandating that most of the money go to actual healthcare seems reasonable too, since so much fails to do so, normally.
The ACA also mandates that people get insurance, or pay a fee. This is the one part that the majority of Americans don’t like (most of the other stuff polls pretty well). Part of what is so tricky about this is that insurance in a traditional sense is different than health insurance. When we get, say, fire insurance, we are pooling risk with others. We know there is a 1 in a 1000 chance we’ll need to use it. Insurance is like if we were to get together with 1000 other people and each pay 1/1000 of the cost to replace whoever’s house burns down. But with health insurance, we pool risk in the same way, but instead the insurance pays for our regular, yearly expenses. It’s weird. But we want it to do that—since people fail to get preventative care if it isn’t paid for, and their later illnesses cost a lot socially, and economically, and not to the sick people and their families. So, we have health insurance. It’s this funny thing that behaves in funny ways.
What’s difficult about this is that at different stages of life, you are more or less likely to get sick or have a baby, and you know it. Theoretically, if your insurance company was like God and could look at every aspect of your health perfectly, it could predict everything and would charge you accordingly (this year, you will cost $10,000. Go ahead and pay $10,000 now). Of course, that’s not real life. We rate people by risk. But if we let insurance companies do too much risk rating, it creates situations we don’t like. Old people have to pay an obscene amount of money. Kids with cancer or congenital illnesses are extremely costly. The better our risk-rating, the more it costs these people to get coverage.
The idea of insurance is instead to insure against such things (like getting financially ruined because you are old or have a disease). So we “group rate”. If you get a group of people together with differing levels of risk, the price is a bit higher than it would be for the many healthy people, and much cheaper for the unhealthy. This is what employer-based insurance has done for years. It accounts for a few things (maybe your age), but largely allows the whole pool to have a rating, rather than just you. It’s actually a form of redistribution (which is what insurance is).
The individual market has not worked this way. With no group to buy with, there was no way to do this. Now, the exchanges are making this more possible. But the only way to make it financially viable, is if healthy people join. After all, if everyone that joins is sick and old, the costs themselves will be as high as they would have been in the first place. And the healthiest of these sickly people will quit, since they are much healthier than the average person in the sick little group (and so they figure they can get by without insurance, when they see the super high price of the insurance). But if the healthier sickly people leave, the average group member is even sicker, and the cycle repeats itself. This process is part of something called adverse selection and if it gets out of hand, it is called a death spiral. It dooms an insurance pool. The mandate is to prevent that. It’s to create group-rating for people who cannot access it because they don’t work for a company that provides insurance. And just like group ratings inside a company involve redistribution (yep, private sector does it too!) this too involves redistribution from the healthy to the sick. In some sense, that’s the essence of insurance. In any case, it’s why there is a mandate. There are pressure groups actually trying to get young people not to sign up, so the overall premiums will shoot up and it will tank the whole system. So it seems that at least some on both sides of the debate think the mandate is necessary for the whole thing to work. Whether it is, I cannot say.
Medicare works similarly. The young subsidize the old, with the promise that when they are older, the new young will subsidize them.
There are a few subsidies and tax breaks that expand access to insurance. If you buy insurance on the exchange, and you have certain income levels (up to 4X the poverty level, I think), you can get subsidies that lower the price of your insurance. That means that society as a whole will pay a part of your insurance (this is a classic subsidy to help the poor get what has been deemed an essential item). There is also a tax break for small businesses, making it cheaper for them to provide insurance. This is a form of subsidy, this time to employees of small businesses. This was probably because the tax code has mostly helped employees of large businesses get insurance in the past, and it make it so the employees of small businesses have a chance at it too.
There are a couple of other items. There is research like data gathering for understanding health disparities (which communities, income levels and racial groups get worse care, or outcomes, and why, and what we can do about it). Long term care plans will be offered (I think on the exchanges), which will be helpful to many families.
The ACA obviously needs a revenue source, given all the subsidies and tax breaks. Those will come from a small increase on the Medicare Tax on high income, some fees to insurers and taxes on pharmaceutical companies and device makers. There will eventually be a tax on “Cadillac” plans. These plans are super fancy and encourage too much health care consumption. The intention of this is to raise the cost of buying into such plans, because they make the system more expensive. Lastly, the subsidy (tax break) for health spending accounts will not cover over-the-counter drugs (like Advil) that were not prescribed by a doctor anymore.
The effects of taxes are more complicated than most people let on. The taxes on pharma, for instance, will likely roll down to consumers (or the stockholders of those companies) to some degree through increased costs. So health consumers in general, or maybe healthcare investors, will subsidize the needier people in particular. The Medicaid taxes on high income are small enough that they are unlikely to affect incentives to work, I think. They aren’t perfect, but aren’t too badly designed, from what I can tell.
The act sadly does create what are called “perverse incentives” too. These are incentives that undermine the goal itself or other related goals. So, the fact that employers with 50 or more full time workers have to provide insurance will get a lot of people insured. It also means a lot of employers will turn to using contractors or keeping people from reaching full time. Some large employers are dropping coverage, now that the exchanges are in place and going to be subsidized. Some of those workers will be less well off, although it’s not clear how much. By dropping insurance, the employer will save a lot of money, and this may ultimately free up resources for competitive wage increases (since they were already willing to put the money into benefits). You’d have to consider whatever wage inflation occurs when you think about the costs and benefits. The money may instead flow to shareholders, depending on the dynamics of the particular industry that the employee is in. It may also just preserve the firm, or a number of jobs in the firm, instead. That’s hard for you to measure, since you don’t know if you would have been cut, but you have to figure it in.
Since many employer sponsored plans are nicer plans, that means that the new minimums (in terms of benefits) for plans in the exchanges, probably won’t add many features (nor costs) to the people who get dropped by their employer. But it will depend on the person, and depend on how heavily the employer was subsidizing the plan to begin with.
One more danger is poor subsidy design. The Washington State online tool for estimating your costs seems to reveal something very stupid to me. It looks like at a certain income level you go from a lot of subsidy to zero subsidy. This is a classic frustration of Republicans with many pro-social justice policies from the left. The way the website looks, for some people, if they make an extra thousand dollars in a year, they will pay an extra six thousand dollars for their health insurance! The subsidy should taper gradually, as a percentage of income, not in big steps like it seems to. That creates an incentive to make less money and actually punishes you for making more. I don’t yet know if that is a state specific thing, if the website is estimating inaccurately, or what. In any case, if it is that way, it should be changed to a smoother transition.
Like any policy, there are winners and losers. Everything is redistributive compared to some other alternative way the world could be (and redistribution doesn’t always go to the poor). Life before the affordable care act was redistributive compared to the nineteen eightys, and the ACA has shuffled the deck again. The young and the healthy, just like inside companies, will now subsidize the older and the sicker. The people are satisfied with a spartan plan (usually the healthy, but not always) will now subsidize the rest by having to buy a better plan. Men will subsidize women, particularly of childbearing age, and those past childbearing age will subsidize women and other people’s children. The rich will subsidize the poor and everyone will subsidize the poor. Providers, less able to charge for duplicate or unnecessary testing and procedures, will have some of their resources redistributed to consumers.
Again, every economic policy, free market or otherwise, redistributes wealth in all kinds of directions. There are big questions about who it should go to, when, why, and how much. I have lots of opinions about this stuff, but am trying not to let them infect this analysis. My goal here has just been to help you see what is actually happening under the Affordable Care Act.
In my opinion, it’s overall a good idea, one that will make the world a more just place, expand the effect of the market and make consumers, as a whole, better off. But I think the minimum standards for the plans is too high, and I don’t think older people should have to support younger people’s fertility, especially when they already pay more somewhat simply because they are older. The subsidies better be gradual, instead of what they appear to be, and some of the perverse incentives could use some tinkering. And where the purposeful or accidentally redistribution happens in a way that hurts those in need, or even regular folks very much, it needs some reworking. A radical market based plan might work better in the future as we get better data for evaluating providers and procedures and drugs. A single payer plan works far better in lots of countries. Still, overall, I think the ACA is worth it, and I think it’s a substantial improvement. But I don’t want to minimize the costs and challenges and the stuff that should be adjusted. These are real.