by Sam Myszka
A few summers ago, I began working at a grocery store near my old high school and I asked the managers for 30 hours a week of work. Eventually, the produce manger replied to me that he could not give me 30 hours a week, but he could give me 29.5 instead. I thought this was odd, but I consented without protest and did not think much more about it. Why such an odd number? While writing this paper, I realized this was most likely because of the Affordable Care Act (ACA) or Obamacare. Because of it, employers must offer employees who work at least 30 hours a week insurance or pay a penalty. I was never able to connect those dots before. Although this is an example of Obamacare’s impacts in the labor market, it exemplifies why the consequences of this legislation are so interesting, powerful, and pervasive in our economy.
The debate surrounding the ACA centers around the omnipresent tension between efficiency and equity in society. How do we allocate our finite resources? This is all about economics. The legislation was developed in response to growing concerns in the United States regarding disparities in access to health care. Rising medical care prices further complicate this issue. Our ultimate goal is to provide the greatest number of people with the best quality of care possible. To realize these objectives and also contain costs becomes challenging. There are many trade-offs. Because this market presents such sober humanitarian issues, health care seems to be one of the greatest challenges that applied economics faces today.
Literature Review
Researchers from the RAND Corporation wrote a report in 2013 entitled Effects of the Affordable Care Act on Consumer Health Care Spending and Risk of Catastrophic Health Costs. RAND Corporation. It discussed the implementation of the health care law and its implications for consumers. The purpose was to discuss policy insights regarding how this law would impact consumer spending—namely out-of-pocket costs, premiums and the risk of catastrophic expenditures.
In this paper, there are two different pools of consumers examined. The first group are those who are newly insured due to the law. There are subsections within this group. Under the ACA, Medicaid was designed to expand and enable the uninsured to purchase insurance for the first time. The authors estimated that out-of-pocket spending for this group of consumers would fall drastically from $1,463 without the ACA to $34 in 2016 (Nowak, S., Eibner, C., Adamson, D., & Saltzman, E., 2013, p. 9-10). Government assistance accounts for this reduction.
There are also uninsured consumers who moved into the individual market for the first time. This group purchases insurance through the ACA-regulated individual exchanges. The government provides subsidies to this group to offset premium costs. These are people who are within 100-400% of the Federal Poverty Level (FPL). This report presents that total health care spending for this group always increases. Out-of-pocket costs decrease, but these decreases are more than offset by the newly added premiums. Accordingly, spending increases most for the group of consumers who are above 400% of the FPL and thus ineligible for subsidies (Nowak et al., 2013, p.11-12).
Other consumers studied were those who were projected to change their source of coverage pursuant to the law. The report estimates that 8.5 million people will switch coverage in the individual markets. For people who are within 100-138% of the FPL, total health care spending is cut by more than half or about $2,600 dollars. For people within 138-400% of the FPL, total health care spending decreases by about 20% or $900 dollars. For consumers with earned incomes greater than 400% of the FPL, total health care spending is estimated to increase 9% or about $450 dollars (Nowak et al., 2013, p. 15-16). Generally, these changes can be explained by the presence or absence of government subsidies.
Additionally, some in the pre-ACA market had policies with high total cost-sharing and high out-of-pocket expenses. Obamacare requires insurers to adhere to minimum levels of medical expense assistance and sets out-of-pocket maximums for all income brackets in the health care market. The authors state this limits the risk of catastrophic spending (Nowak et al., 2013, p. 19). Health Economics and Policy, by James W. Henderson, has proven to be an invaluable resource, not only of important terms and relevant data sources, but also of the pertinent theoretical and empirical foundations that reflect and elaborate on the core materials covered in this class. There is a plethora of information on how the Affordable Care Act has impacted the economy. There is so much in this textbook, yet only a few, simple points will be made.
One of the more pertinent and interesting sections in this textbook discusses the implications of the consumer choice model studied in the
first half of this class (Varian, H. R., 2014, p. 74). It describes how the utility function of a given consumer in the health care market changes with a change in health status (see Figure 1). When a consumer is healthy, they are less willing to trade income for more office visits. In this scenario, their utility function is flatter and optimal choice occurs with a low level of consumption of medical care visits—see panel (a). Conversely, when sick, preferences shift and their utility function becomes much steeper. With this utility function, consumers are willing to give up much more income to buy medical services and a higher level of health care consumption will shift them to a higher level of utility (Henderson, 2015, p. 95).
The author also discusses how the ACA impacts the behaviors of young Americans in the insurance market. The law forbids a premium differential greater than 3-to-1 in a given heterogeneous risk pool. Generally, young people prefer not to spend on health insurance. After all, they are healthy and short of income. If this group is combined in an insurance risk pool with consumers that are older and sicker, young people will end up subsidizing them. If a fair annual premium for the older group is around $4,440 dollars, then the younger age bracket (ages 18-34) must pay premiums that are no less than about $1,480 dollars. This results in young people paying about 85% or more in premiums than they otherwise would without the law, according to Henderson. If young people think premiums are too expensive, they will drop coverage and premiums will rise for everyone else left in the pool. A “death spiral” results from adverse selection. The individual mandate is designed to disincentivize this behavior. Interestingly, this highlights how the pooling requirements make healthy people subsidize older, sicker consumers (Henderson, 2015, p. 199-200).
Lastly, there was an article and a data table summarizing the impacts of the ACA on premiums. Among the different plans offered in 2013-14 for residents of Dallas County, Texas, median premiums for both a 27-year-old, nonsmoking male and a 50-year-old, nonsmoking male both increased. For the 27-year-old, the median premium increased 94% depending on the different ACA-compliant plans available in 2014. For the 50-year-old, the median premium increased 33% depending on the various ACA-compliant plans available. The author lists expanded benefits, subsidies, and pooling requirements as reasons (Henderson, 2015, p. 172-173).
Finally, Implications of the Interaction Between Insurance Choice and Medical Care Demand, by Richard Dusansky and Cagatay Koc, proposes a model for how health care consumers react to rising costs. In this paper, the authors analyze consumer health care demand responses in the face of changing gross prices of medical care. By way of the moral hazard effect of insurance, this study suggests that demand for medical services can be upward sloping. This reflects the behavior of a Giffen good. This is acknowledged in the study and a whole section is devoted to the discussion of medical care as a “quasi-Giffen good” (Dusansky, R., & Koç, Ç, 2010, p. 138). If the demand for a good increases when its price increases, under well-behaved preferences, then it is a Giffen good (Varian, H. R., 2014, p. 104-105).
Instead of developing a theory then observing reality to watch if the numbers fit the theory, the authors state that this is an empirical reality that needs a theory. Both a budget line and utility function are presented. Variables used include “Y” as income, “R” as health insurance premiums, “c” as a composite consumption good, “m” as composite medical care services with a gross price of “p”, and “” as the percent of out-of-pocket costs paid by the consumer (Dusansky, R., & Koç, Ç, 2010, p. 132).
The unique contribution of this theoretical paper is that it endogenously derives changes in “”, the consumer’s cost-sharing percentage, with an exogenous change in gross price, “p”. The authors study how a change in gross price changes insurance policy choice. This, in turn, impacts net price, which is ultimately the main variable influencing consumer demand—not gross price. Other papers hold gross price and insurance contract choice fixed while studying changes in cost-sharing. In this paper, net price, or “p”, changes twice. First, exogenously when gross price changes, and second, endogenously when “” changes in response to an insurance plan change. The authors state: “Our theoretical model captures this reality and allows for the insurance policy choice response and its subsequent impact on net price and medical care demand” (Dusansky, R., & Koç, Ç, 2010, p. 135).
They conclude that medical care demand can be upward sloping. A rise in prices increases insurance demand and this, in turn, can increase total medical care demand. When health care becomes more expensive, a consumer would consider buying more insurance to shield themselves from greater financial risk. For this to be correct, insurance demand must increase with the increasing gross prices of health care. The authors state this has some empirical support (Dusansky, R., & Koç, Ç, 2010, p. 142).
Empirical Analysis
The Affordable Care Act has decreased the quantity of uninsured Americans. According to a report by the Kaiser Family Foundation published in 2019, the ACA decreased the number of uninsured Americans from 44.4 million in 2013 to 29.1 million Americans in 2015. That is a decrease of 15.3 million Americans in two years (Garfield, R., Orgera, K., Damico, A., & the Kaiser Family Foundation, 2019, p. 7). These trends are reflected in Figure 2.
This change is consistent with the legislation’s goal of expanding access and coverage. The ACA increases health care consumption and, by extension, medical services. There are a number of mechanisms by which this happens. One way is through the use of government tax credits and subsidies for consumers who are within about 400% of the Federal Poverty Level. This assistance reduces the net price consumers pay for their plans. Theoretically, reductions in net price increase insurance demand. In addition, the individual mandate provision penalizes people who choose not to purchase health insurance. Consequently, this incentivizes consumption.
The legislation’s goal of increasing health insurance coverage has succeeded. However, to decrease costs across the entire system may prove more difficult. Decreasing costs means decreasing—or at least slowing the rate of—health care expenditures by the average consumer (Perkins, D. F., & Rich, A., 2019, p. 1). Accordingly, data provided by the Federal Reserve Economic Database, and displayed in Figure 3, shows that instead of decreasing personal consumption of health care services, the law has potentially accelerated spending when it fully manifested in 2014 (Federal Reserve Economic Data, 2020).
Similarly, the same authors extracted broader measures of health expenditures data from the Centers for Medicare and Medicaid Services (CMS) website and juxtaposed the average yearly growth rate in expenditures per person—in chained 2012 dollars—with the dominant government policy during the period. I took this data and constructed my own bar chart to display these findings. The result is Figure 4. The first three years of partial ACA regulation reduced health expenditure growth from 2.0% in the pre-ACA period to 0.8%. Then, the growth rate subsequently increased to 2.9% during the period in which the ACA was fully implemented—2014 to 2017 (Perkins, D. F., & Rich, A., 2019, p. 3).
One of the most readily understandable forces that could be driving these changes is the rise of consolidation among providers and insurers. Mergers and
acquisitions have increased since the ACA was signed into
law (American Hospital Association, 2016). In fact, Obama-era advisors have publicly stated the legislation was designed to encourage integration across the sector (Kocher, R., Emanuel, E. J., & DeParle, N. M., 2010). The idea was to foster economies of scale to decrease costs, assist in standardization in order to enhance care quality, and increase the sector’s access to capital (Singer, L. E., 2019). Lawrence Singer, a law professor from Loyola University Chicago, reiterates that the current regulatory and business environment in which insurers and providers operate incentivizes consolidation and vertical integration. Due to the guaranteed issue clause of the ACA, which forbids insurers from denying customers with pre-existing conditions, and other factors, managers have leaned toward an economies of scale strategy in order to spread high costs over large customer bases (Singer, L. E., 2019). Figure 5 shows the market concentration of insurers in each metropolitan statistical area (MSA). Figure 6 presents the market concentration level of providers for each MSA in a similar manner. Both of these figures are derived from data gathered in 2016 (Fulton, B. D., Arnold, D. R., & Scheffler, R. M., 2018).
Empirical evidence suggests that monopoly insurers in the ACA marketplace charge higher premiums at an accelerated rate (Van Parys, J., 2018). Economic theory can help explain why this is so. Firms with increased market power charge prices that exceed marginal costs. The difference is often called a markup. As described in the monopoly model presented by Hal Varian, a monopolist firm restricts output, in this case health care, and charges a higher price than the efficient market price in order to maximize profits (Varian, H. R., 2014, p. 459-460). In contrast, in a perfectly competitive market, price is set equal to marginal cost; and in the long run, all economic profits are competed away to zero (Varian, H. R., 2014, p. 439-440). Because consumer surplus is the area above the price line and below the demand curve, the efficiency associated with a perfectly competitive scenario allows consumer surplus to be maximized. On the other hand, the deadweight losses created under a monopoly scenario seem to reflect that the more concentration in a given industry, the more inefficient it becomes, and the more consumer surplus suffers (Varian, H. L., 2014, p. 460). These models can help explain how competition in the health care market can affect consumer welfare.
It is clear and evident that the ACA marketplace—and the health care system more broadly—is not purely monopolistic. Yet the dichotomy between perfect competition and monopolistic behavior studied in this class can help to explain how consumers may become affected in the future. Noticeably relevant is that consumer surplus declines under a monopolistic scenario from its maximum under perfect competition. It would then make sense to extrapolate that consumer surplus is inversely related to market concentration. Choices and options for consumers also decrease when consolidation increases.
Conclusion
It must be nearly impossible to study all of the Affordable Care Act’s effects on all consumers in all areas of the health care market. There are many different people in different situations and the law impacts them all differently. Because of this, my conclusion will provide a brief summary and be dedicated to discussing limitations.
This paper is largely inhibited by the complexity of the ACA and the health care system itself. The controversial nature of this law makes conducting research difficult. There is an empirical battle going on over this issue. I found many contradictions in the literature. For example, the Office of the Assistant Secretary for Planning and Evaluation within the DHHS, will publish material that will either cast a favorable or unfavorable light on the ACA depending on whose political appointees are running the office. Ultimately, in the latter portion of my empirical analysis I decided to focus on how oneconsequence of the law, market concentration, can impact consumers. This is partly because I knew how to tie it into class materials. In that section, I tend to conclude that the ongoing consolidation in this industry adversely impacts consumer surplus in the health care market and is at least somewhat linked to the implementation of the ACA. This is supported by empirical studies and economic theory discussed in class. Although, I would not be surprised if another researcher could produce opposite results.
Finally, the ACA impacts many aspects of the American economy beyond consumers in the health care market. It changes the way providers do business and how physicians provide care. It impacts our federal budget. It impacts small businesses that have nothing to do with health care. There are many unanswered questions and ideals that persist. The costs and benefits received by consumers and taxpayers due to the law must be weighed within the broader context of its impacts on the whole economy and by what policymakers and the public value the most.
References
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