Achieving ‘Affordable’ Health Care | Part Four of a Series


Douglas McSwain

Douglas McSwain

This series on the Affordable Care Act (ACA), also known as “Obamacare,” has examined major changes coming to health insurance coverage, the health-care delivery system and its workforce. But, a frequently asked question about the ACA is whether it can live up to its name (and the hype) and make health care actually affordable.

There are two levels to this question. At the micro level, will the ACA reduce the cost of health care for you, your family and business? At the macro level, will it reduce spending in massive public programs such as Medicare and Medicaid? Understanding the ACA’s provisions to achieve affordability will provide a framework for evaluating news about the ACA and health-care policy in America.

The effect of the ACA mandates

Perhaps the most significant tool to achieve affordability is the ACA’s mandates. As you’ve probably heard by now, the individual mandate requires individuals to obtain health coverage or pay a penalty. Likewise, the employer mandate requires large employers to offer coverage or pay a penalty. These mandates encourage people and businesses to obtain health coverage, and the more who do so should, in theory, make coverage cheaper for everyone.

The mandates are only effective, however, if the penalties are severe enough to induce the purchase of coverage. To encourage a buyer not otherwise disposed to purchase, the penalty must outweigh the perceived cost of no coverage. In this respect, some have questioned whether the ACA imposes penalties severe enough to induce widespread compliance.

Determining what penalty will encourage coverage without being too costly is tricky because if coverage itself costs too much, the penalty may never be high enough. The individual penalty for the year 2014 totals $95 per person or 1 percent of income, whichever is greater, and annually rises to $695 or 2.5 percent of income by the year 2016. The penalty is incurred for any month in which a person is not covered. After 2016, it will be adjusted in accordance with cost-of-living increases.

The employer penalty depends on size. For businesses employing 50 or more full-time equivalent employees, the penalty is $2,000 multiplied by the total number of employees unless affordable health coverage is offered to 95 percent or more of them. However, the calculation of this penalty exempts the first 30 employees, which softens the incentive to comply if businesses employ only, or just above, the 50-employee threshold. The incentive strengthens the more employees there are over 50. For smaller businesses (less than 50), there is no penalty at all. The only incentive for businesses with 25 or fewer employees is substantial tax credits.

The ACA’s “play or pay” mandates and tax credits will not attain universal coverage; the non-partisan Congressional Budget Office (CBO) recently projected that by 2023, there still will be 29 million Americans uninsured. However, because of the ACA, over the next decade, 27 million more Americans will be covered, as compared with 56 million uninsured now.

These newly covered people will constrain the rising costs of health care for everyone, over time. The CBO projects a 6 percent reduction in per person spending in Medicaid by 2020 and a 5.5 percent reduction in spending growth in Medicare due to the ACA.

The countervailing effect of ACA coverage requirements

The ACA forbids exclusions of pre-existing health conditions and discrimination against those who are otherwise unhealthy. It requires insurers and employer plans to “guarantee” coverage regardless of health  and to set premiums in accordance with local population health factors —called “community rating” — that do not vary based on any one individual’s health status.

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