Despite the initial catastrophe of the Healthcare.gov rollout last fall, the implementation of Obamacare bounced back and represents nothing like the bureaucratic nightmare once feared by conservatives.
If you’ve been paying attention to the headlines, you’ll know that the last year has been rough on President Obama. Just in 2014, he faced countless crises abroad, including the specter of a sectarian civil war in Iraq, violent secessionists in Ukraine funded and armed by Russia, and a cycle of violent action and reaction between Israelis and Palestinians. Things have not been easier for the President at home. The Republican-controlled House of Representatives voted to sue him for delaying implementation of parts of the Patient Protection and Affordable Care Act (Obamacare)— the same piece of legislation that the House voted to repeal 54 times in the last four years. Some conservatives are even calling for his impeachment. In July, a D.C. Circuit Court of Appeals ruled that subsidies provided to mil- lions of Americans to help purchase health insurance are illegal, all due to a small typo in the Affordable Care Act. And none of this includes the scandal at the VA, the child-migrant crisis along the US-Mexico border, and the Bowe Bergdahl controversy.
The nonstop flood of crises at home and abroad may give the impression that the Obama administration is becoming un- hinged. Some argue that the daily require- ment for crisis management has “derailed” President Obama’s agenda. Others claim that the administration is “unraveling” at the seams, and even that the president is now just “running out the clock” on his last term in office. Perhaps as a result of this media narrative, President Obama’s public approval rating has plummeted. A recent Gallup poll found that at the end of July, only 41% of Americans approved of his job as president. In comparison, the average approval rating of presidents since 1938 has been around 53%, and George W. Bush had an approval rating of 39% at the same point in his presidency.
But consider this article an attempt to breathe some optimism into the hearts of democrats and progressives on campus. Despite the recent string of scandals, there are many bright spots in President Obama’s record in office that ought to be celebrated. For example, new EPA restrictions on carbon emissions by power plants represent today’s most meaningful effort to slash the United States’ contribution to global climate change. Financial reform is already making substantial changes to the financial industry—changes that will lead to greater financial stability and regulatory oversight. Should these re- forms and regulations continue on their cur- rent path, they will leave a lasting mark on the United States, well past President Obama’s time in office.
However, there is an even more significant and under-reported success story from the Obama administration: health care reform. Despite the initial catastrophe of the Healthcare.gov rollout in this past fall, the implementation of Obamacare bounced back and represents nothing like the bureaucratic nightmare once feared by conservatives. It is already improving the lives of millions of Americans by expanding health insurance coverage to previously uninsured children and adults at a minimal cost. The many in- centives it creates for health care providers are slowly reshaping the industry and may begin to rein in the rapid growth of health care costs. Contrary to the popular narrative,
Obamacare’s first year has not been a failure, but an unambiguous success that deserves more attention across the nation.
The Affordable Care Act was designed around one simple policy goal: to extend health insurance coverage to all Americans, regardless of pre-existing conditions and income. To achieve this goal, it makes three changes to the American health care system. First, the Affordable Care Act prohibits health insurance providers from denying coverage to those with pre-existing conditions and mandates that insurers calculate premiums using “community ratings,” mean- ing that insurers offer the same premium to individuals in the same geographic area. In practice, this prevents insurers from discrim- inating based on gender and age. Second, the Affordable Care Act implements the “individual mandate,” meaning that all individuals not covered by employer-based insurance, Medicare, Medicaid or another public health insurance program, are required to either purchase health insurance from the private market or pay a penalty. Finally, the Affordable Care Act expands eligibility to Medicaid and offers subsidies to those who neither qualify nor can afford private health insurance.
Together, these three components are described as a “three-legged stool”—a term coined by MIT economist Jonathan Gruber, who helped write the legislation. Like a stool, the Affordable Care Act requires that all three legs be properly implemented in or- der to function.
Let’s look at the first leg on its own— the system of community ratings. Alone, this statute creates perverse incentives for those deciding whether to purchase health insurance. Because health insurers can no longer deny coverage based upon pre-existing conditions, a healthy individual has no reason to pay for health insurance all the time. Instead, that individual can wait until he or she is sick and purchase health insurance at the last minute. These incentives can create what health care economists ominously call the “death spiral.” If many healthy individuals choose to wait until they are sick before pur- chasing health insurance, then the proportion of sick individuals in the insurance pool rises, causing premiums to increase. The increase in premiums then pushes more healthy indi- viduals to drop their coverage and wait to buy at the last minute, causing premiums to rise even further. As a result, the destructive feed- back loop created by the use of community ratings alone, poses a serious threat to the health insurance industry if it came to pass.
To prevent health insurers from denying coverage to those with pre-existing conditions and avoid the health insurance death spiral, the Affordable Care Act thus includes its second leg—the individual mandate. By requiring every individual to have health insurance, the individual mandate prevents healthy individuals from waiting until the last minute to purchase coverage. In doing so, there are more healthy individuals in the insurance risk pool, which drives down premiums. However, even community rat- ings and the individual mandate together are not feasible policy, because millions of Amer- icans do not receive health insurance from their employers nor can they afford private health insurance.
And this is why the Affordable Care Act includes its final leg—Medicaid expansion and federal subsidies for those who do not qualify for Medicaid. The final leg ensures that everyone can afford health insurance and avoid the penalty imposed by the individual mandate. Together, the three legs of the Affordable Care Act form the basis of expanding health insurance coverage while also avoiding the dangerous health insurance death spiral.
In theory, the Affordable Care Act represents a coherent strategy to expand health insurance coverage to millions of Americans. While it is still early to determine how well it works in practice, the early results so far are overwhelmingly positive, especially given that millions of previously uninsured Americans now have access to affordable health insurance. Since Fall 2013, Charles Gaba, a statistician and web developer, has been tracking the enrollment figures on the national and state health care exchanges— created to help individuals purchase private
health insurance—on his website, Acasig- nups.net. By aggregating figures released by states and the federal government, he calcu- lates that since October 2013, nearly 9 mil- lion individuals have purchased health plans through health insurance exchanges. Of these, 8 million have begun paying premiums. Moreover, the expansion of Medicaid provides health insurance access to 10 mil- lion additional Americans.
Most importantly, countless surveys find that as a result of the implementation of the Affordable Care Act, the number of un- insured Americans has fallen. The New England Journal of Medicine finds that since 2013, 10 million Americans have gained insurance and that the uninsured rate fell by 5.2%. The Robert Wood Johnson Foundation and Urban Institute estimate that the num- ber of uninsured Americans fell by 8 million. Studies from Gallup and the Rand Corpora- tion/Kaiser Family Foundation find a similar pattern. While estimates of these studies vary due to different samples, the message is con- sistent: Obamacare has successfully expand- ed health insurance coverage.
California is a particularly import- ant case study because, as Princeton economist Paul Krugman argues, it represents the ideal implementation of the Affordable Care Act. Its online health insurance exchange was glitch-free from the beginning, it embraced the Medicaid expansion, and it engaged in an aggressive PR campaign to reach the unin- sured. Again, the results are simply amazing. The Kaiser Family Foundation finds that 3.4 million Californians gained access to health insurance, causing the uninsured population of California to fall by 58%–the largest decline in the nation. Taken together, more Americans than ever before have access to health insurance thanks to the Affordable Care Act.
Most surprisingly, the Affordable Care Act has been able to expand health in- surance coverage at a minimal cost to indi- viduals. For those purchasing health insurance through the national or state exchanges, the premiums they are paying cannot be found anywhere in the open market. The Department of Health and Human Services found that among those receiving subsidies, the average monthly premium paid is only $86— 24% of the average premium paid on the open market by individuals.
The ACA’s successful expansion of affordable health insurance coverage has left many conservatives shocked and desperately searching for explanations. Republican Senator John Barrasso from Wyoming went so far as to claim that the Obama administration is “cooking the books.” However, no one should be surprised by the Affordable Care Act’s suc- cess. The core components of the Affordable Care Act—ending discrimination by health insurance providers, mandating health insur- ance coverage for all, and subsidizing health insurance for those that cannot afford it—are identical to the health care reform package carried out in Massachusetts in 2006. The Kaiser Family Foundation found in that six years after its implementation, the uninsured population of Massachusetts fell by 50 per- cent. As a result, during the debate on health care reform in 2010 and before the Affordable Care Act’s implementation in 2014, there al- ready was substantial evidence that it would work. Jonathan Gruber, who helped construct the Affordable Care Act and also Massachusetts’ health care reform, once compared the two pieces of legislation, saying that “They are the same bleeping bill!”
However, there is one important area in which the Affordable Care Act is different than Massachusetts’ health care re- form: cost control. Jonathan Gruber has also explained that the Massachusetts policy did not contain measures to limit health care cost growth, and the facts bear that out. The Kaiser Family Foundation points out that health care spending per capita in Massachusetts grew 15% faster than the national average since 2006. The Affordable Care Act, on the other hand, includes a number of reforms designed to shift the incentives of hospitals and clinics towards providing quality, low-cost care. In fact, hundreds of economists (includ- ing Princeton’s very own Daniel Kahneman, Alan Krueger, and Uwe Reinhardt) signed a letter that explained to Congress how “the Af- fordable Care Act contains essentially every cost-containment provision policy analysts have considered effective in reducing the rate of medical spending.”
Specifically, the Affordable Care Act promotes greater competition among health insurers and slowly shifts the payment structure of health care providers towards outcome-based measures. One the most significant measures is the establishment of Accountable Care Organizations (ACOs). ACOs are networks of hospitals and doctors that assume responsibility for the care of their patients along multiple dimensions, and whose payments are tied to quality measures.
In the past, health care providers were large- ly paid only through fee-for-service systems, meaning that they had a strong incentive to run needless tests and reap the extra profit. The payment of ACOs, on the other hand, is tied to quality measures, such as how well patients manage chronic diseases. Already 14% of the US population is being served by an ACO, along with 4 million Medicare beneficiaries. The Affordable Care Act also alters health care provider incentives through changes to Medicare itself. For example, Medicare payments will be cut to providers that have high readmission rates.
While it is still early, such reforms may help bend the health care cost curve. Re- cent evidence found that in 2012, health care spending as a proportion of GDP actually fell 17.3% to 17.2%. That isn’t much, but it is an improvement considering the eye-wateringly high rates of health care cost growth in the 2000s. Moreover, if this trend continues, it would be a boon to the US federal budget. The CBO estimated in the 2014 Long-Term Budget Outlook, that slower health care cost growth could save the United States $1.23 trillion in reduced spending on Medicare and Medicaid over the next decade.
Nonetheless, the significant slowdown in health care cost growth could also be due to reasons outside of the Affordable Care Act. Weak economic growth and a slack labor market could be driving down health care utilization. Some argue that the move towards higher copays and premiums by pri- vate insurers is leading consumers to also cut back on health care spending.
While these are plausible explana- tions, they do not explain Medicare’s most recent success. The 2014 Medicare Trustees’ Report finds that Medicare hospital spending per person is falling and has been since 2011. Medicare, as program for retired Americans, is insulated from the broader economic slow- down and has not seen a significant shift to higher copays. Instead, many health care ex- perts argue that the new incentives for health care providers created by the Affordable Care Act explain this shift. Readmissions for Medicare enrollees are also falling due to the changes in the Medicare payment structure by the Affordable Care Act. Peter Orszag, former head of the Congressional Budget Office and Office of Management and the Budget, argues that health care providers expect that in a few years, most of their payments to be tied to outcome-based measures of performance. And as a result, they have started to invest in methods that provide better care at a lower cost. The Affordable Care Act, with its diverse palette of changes to the health care industry, plays an enormous role in shaping these expectations.
The Affordable Care Act will likely be President Obama’s signature achievement in office. More Americans already have access to health insurance than ever before. Health care cost growth seems to be slowing down due to cost control measures in the legisla- tion. If these trends continue, the Affordable Care Act will not only reshape the American health care industry, but also transform the long-term outlook of the federal budget and the US economy. This long-term perspective is important to keep in mind while navigat- ing our way through the 24-hour news cycle. No matter the latest headline or controversy, history will judge President Obama much differently thanks to the Affordable Care Act.
Ashesh Rambacham is a sophomore from Minnesota with academic interests in economics and mathematics. He is particularly interested in development, health care, and anything that falls under the umbrella of macroeconomics. When he is not reading the latest from the econ blogosophere, he spends most of his free time daydreaming that he can dunk a basketball.