The Affordable Care Act in Depth

Barack Obama signing the Patient Protection and Affordable Care Act at the White House, March 23, 2010

The Affordable Care Act in Depth

President Obama signing the Patient Protection and Affordable Care Act on March 23, 2010.

Photo by Pete Souza / CC BY 2.0

The Patient Protection and Affordable Care Act (ACA)—the sweeping health care reform sometimes known as ”Obamacare“—was enacted in 2010. The law aims to extend health coverage to uninsured Americans, estimated at the time the bill was passed to number around 47 million.

To accomplish this, the law expanded insurance coverage in three ways:

  1. Individual Insurance Marketplaces: Online exchanges operated by individual states or by the federal government, where individuals and families can buy health insurance directly from insurers. People with incomes between 100 and 400 percent of the federal poverty level are eligible for premium subsidies to help them buy coverage.
  2. Small Business Insurance Marketplaces: Online exchanges (known as Small Business Health Options or SHOP) to help firms with 50 or fewer employees cover their workers.
  3. Medicaid Expansion: Broader Medicaid eligibility to include those earning up to 138 percent of the federal poverty level.

The ACA also mandated new approaches to reducing costs and improving quality, many focused on Medicare and Medicaid populations. These included reducing payments to hospitals for some Medicare services and promoting experimentation with new payment and delivery models.

Implementation of the ACA has been marked by controversy and unexpected twists and turns, including court challenges and delays in key provisions. To understand the impact of these developments and to monitor the effects of the ACA, RAND used COMPARE , a microsimulation modeling tool that allows us to estimate the likely effects of policy changes in key areas of health reform on key outcomes, including health coverage, employer-based insurance, consumer costs, and government spending.

In addition to COMPARE , we developed an innovative survey tool, the Health Reform Opinion Survey, to monitor enrollment trends following the opening of the new marketplaces and to track shifts in public opinions and knowledge about the ACA. What makes this tool unique is its ability to follow the same nationally representative sample of individuals from month to month to identify changes in their health care coverage as well as shifts in opinion and knowledge about the ACA.

Below we highlight what we have learned from our studies of the ACA to date as implementation continues to unfold.

Despite its goal of universal health coverage, the ACA leaves substantial numbers of Americans without access to insurance.

The ACA Is Reducing the Number of Uninsured

A reporter reads a summary of the performance and usage of the Massachusetts ACA health insurance exchange, Boston, November 17, 2014

Photo by Brian Synder/Reuters

More than three years after the law's enactment, enrollment in the online Marketplaces began in October 2013. Notwithstanding widely reported problems with the rollout of the Marketplace websites, sizable numbers of previously uninsured people were able to obtain coverage over the first and second enrollment periods.

Analysis of survey data about Americans' health insurance enrollment from October 2013 to April 2015 showed that 22.8 million Americans became newly insured and 5.9 million lost coverage, for a net of 16.9 million newly insured Americans. The total number of uninsured Americans dropped from 42.7 million to 25.8 million.

Much of this increase was driven by gains in employer-sponsored coverage. Among those newly insured, 9.6 million people enrolled in employer-sponsored health plans, followed by Medicaid (6.5 million), the individual marketplaces (4.1 million), nonmarketplace individual plans (1.2 million) and other insurance sources (1.5 million).

The study also estimated that 125.2 million Americans—about 80 percent of the nonelderly population that had insurance in September 2013—experienced no change in the source of insurance during the period.

The Individual Mandate Is Effective as an Incentive to Enroll

One of the reasons why people are signing up is the individual mandate. One of the law’s most controversial provisions, this mandate requires that most adults must have coverage or pay a fine. Early in the policy debate over competing legislative designs for reforming the health care system, analysis using RAND’s COMPARE model showed that the individual mandate would be a powerful policy lever in encouraging the uninsured to get coverage.

After the law was enacted, the Supreme Court took up a legal challenge to the individual mandate. The plaintiffs sued to have the individual mandate voided as unconstitutional. In the run-up to the court decision, RAND analyzed the likely effect of eliminating the individual mandate and found that without it, an estimated 12 million people who would otherwise sign up for coverage would be uninsured. The Supreme Court upheld the provision’s constitutionality, interpreting the penalty as a lawfully imposed tax. Subsequent RAND analysis conducted in the early enrollment period underscored the provision’s importance to promoting the ACA’s goal of universal health care coverage. The analysis found that eliminating the individual mandate would cause the number of people enrolled in the individual exchanges to fall by more than 20 percent.

One of the law’s most controversial provisions, this mandate requires that most adults must have coverage or pay a fine.

There Is No Magic Threshold of Young Adult Enrollment Required to Stabilize the Individual Exchanges

During the early enrollment period, debate erupted over the enrollment of young adults in the individual exchanges. Some news stories and commentators maintained that unless roughly 40 percent of enrollees in the individual exchanges were young adults – between ages 18 and 34 – then the costs associated with older, less healthy adults would lead to higher premiums and ultimately destabilize these markets. At the end of the first open enrollment period in March 2014, enrollment figures from the U.S. Department of Health and Human Services showed that 28 percent of enrollees were between the ages of 18-34, while 48 percent were 45 or older.

RAND analysis found that the share of “young invincible” enrollment has only a modest effect on market premiums and stability: A 1 percentage point reduction in the share of young adults translated into a premium increase of less than half of 1 percent. The modest effect is driven partly by the ACA’s tax credits, which create an incentive for some young adults who are eligible for subsidies to remain in the individual market even if other young adults—including a mix of those eligible for subsidies and those not—drop out. In addition, the spending data used as input to COMPARE suggest that, for most enrollees of all ages, premium payments exceed health care spending.

Subsidies Help Stabilize the Individual Marketplaces

To encourage enrollment in the new individual insurance exchanges, the ACA offers tax credits to help lower-income individuals and families buy coverage. These tax credits have faced multiple court challenges. In late 2014, the U.S. Supreme Court agreed to hear King v Burwell, a case that challenges the legality of government subsidies that help low- and moderate-income people buy health insurance in marketplaces operated by the federal government. The legal challenge to these subsidies rests on the grounds that the wording of the law allows such aid only to people who buy policies through state-run marketplaces. RAND researchers used COMPARE to model the likely effects of ending subsidies in the 34 states where the federal government operates individual insurance marketplaces. They estimated that eliminating subsidies for low- and moderate-income people who purchase ACA-compliant plans would reduce enrollment in those 34 states from 13.7 million to 4.1 million—a drop of 9.6 million, or 70 percent. Of these, 8 million would be left uninsured. The analysis also suggested that unsubsidized individual market premiums in states with federally run marketplaces would rise substantially: Annual premium costs for a 40-year-old nonsmoker purchasing a silver plan would rise from $3,450 to $5,060—a price hike of $1,610, or 47 percent.

This analysis was widely cited in the debate in the run-up to the case in amicus briefs submitted to the Court before it heard oral arguments in March, 2015.

Medicaid Expansion Is a Good Deal for States

Another unanticipated swerve along the path to implementation took place in 2012, when the Supreme Court ruled that the federal government could not require states to expand Medicaid. The ruling thus left expansion up to the states. In the wake of this decision, roughly half of the states have expanded Medicaid and half have not.

RAND analysis found that Medicaid expansion is a boon for states: it boosts state economies and benefits the poorest residents by expanding their access to coverage and care and reducing their health spending and exposure to catastrophic medical costs.

Specifically, expansion means:

  1. More Federal Medicaid Funds Per State: Prior to expansion, the federal government paid on average 57 percent of coverage costs. Under the ACA, the federal government pays 100 percent of the coverage costs for those newly insured under Medicaid expansion. After 2016, the federal share shrinks to 90 percent, which is still considerably more than the pre-ACA level.
  2. Greater Access to Care: Medicaid expansion makes health care more accessible to the poorest people — those earning less than 138 percent of the federal poverty level (this amounted to an income of about $16,000 for a single person or $32,000 for a family of four in 2013).
  3. Less Spending on Uncompensated Care: Providing insurance to the very poor reduces uncompensated costs of treatment for this group — an estimated $80 billion in 2016. Currently, about one-third of this spending comes from state budgets.
  4. Reduced Financial Risk for the Lowest-Income Americans.

As of late 2014, momentum seemed to be swinging toward expansion. Additional states had either come around to expanding Medicaid (Pennsylvania) or were reconsidering their earlier decision not to expand (Wyoming).

Employers Have Not Dropped Coverage En Masse

Critics of the ACA made dire predictions that the law’s employer mandate would cause firms to drop coverage for large numbers of workers. This mandate, aimed at larger firms (those with 50 or more employees), requires that firms offer coverage to employees who work at least 30 hours per week. Firms that fail to do this mandate are assessed a penalty of $2,000 per employee, not counting the first 30 employees.

These firms, it was argued, would “do the math” and opt to pay the fine rather than offer insurance. RAND analysis estimated that the effect would be the opposite: that the number of workers receiving employer offers of coverage would actually increase. Early enrollment numbers from 2014 confirmed that most of the newly insured in the U.S.—8.2 million out of a total of 14.5 million newly insured—gained coverage through their employers.

Delaying the Employer Mandate Had Modest Short-Term Effects

During the initial rollout in 2013, political pressure and angst in the business community led the Obama administration to delay enforcement of the employer mandate for a year and then extend the delay for some firms an additional year, until 2016. These delays were cited by critics as signs of the mandate’s ultimate unworkability, suggesting to some that the employer mandate should be scrapped altogether. RAND analysis of the delay’s impact estimated that the delay would have a relatively modest short-term effect on coverage and premiums, mainly because only a small fraction of U.S. employers—less than 1%—were affected by the delay. However, permanently repealing the employer mandate would have a substantial impact on federal spending, resulting in an estimated loss of approximately $149 billion in federal revenue between 2014 and 2024.

The “Keep Your Plan” Fix Had Modest Effects

Yet another controversy—this one self-inflicted by the Obama Administration—emerged when millions of Americans began receiving notices that their pre-ACA health policies had been canceled. This contradicted the promise made earlier by President Obama that Americans would be able to keep their existing health care plans. The Obama administration’s response — the “keep your plan” fix — gave consumers the option of extending their current plan through 2015 even if it was not compliant with ACA regulations. RAND analysis found that the fix reduced the number of uninsured by approximately half a million and also resulted in only modest declines in the numbers of individuals enrolled in the individual markets compliant policies market, though would not produce a “death spiral.”

There Are Winners and Losers Under the ACA

8.2 million out of a total of 14.5 million newly insured gained coverage through their employers.

People standing in line

Photo by Antonio Oquias/Fotolia

Despite its goal of universal health coverage, the ACA leaves substantial numbers of Americans without access to insurance. RAND estimates found that, of the 52 million who would have been uninsured without the ACA, approximately 33 million will become eligible for coverage through Medicaid or the individual marketplace after the major provisions of the ACA take full effect. Some of these individuals will choose not to enroll in coverage. However, an estimated 19 million uninsured Americans will remain ineligible for Medicaid or subsidies, and hence are “left behind” by the ACA.

These people typically fall into one of four groups:

  1. Those With Higher Incomes: Those earning more than 400 percent of FPL ($46,680 for an individual, $95,400 for a family of four) are ineligible for either Medicaid or marketplace tax credits. This group represents 16 percent of the ineligible, uninsured population.
  2. Undocumented Immigrants: The ACA prohibits undocumented immigrants from participating in the Medicaid expansion or receiving tax credits for marketplace plans. We estimate that 23 percent of the uninsured who remain ineligible for public programs are undocumented immigrants.
  3. Low-Income Individuals Residing in States that Don’t Expand Medicaid: In states that do not expand their Medicaid programs, there could be a coverage gap for adults with incomes below 100 percent of the poverty level, and who are ineligible for Medicaid under the state's existing law. These individuals will remain ineligible for Medicaid, and will not qualify for marketplace tax credits. Twenty-eight percent of the 19 million individuals left behind, or 5.3 million people, fall into this category.
  4. Individuals with “Affordable Offers” from Employers: Individual exchange tax credits are available to U.S. citizens and legal residents with incomes between 100 and 400 percent of the FPL. The tax credits cap health insurance spending as a percentage of income, up to the price of the second lowest cost silver plan available in an individual's rating area. People are also disqualified from receiving tax credits if they are eligible for Medicaid or CHIP, or if they have an “affordable” offer of health insurance coverage from an employer. Offers are considered affordable if the employee's contribution for single coverage is less than 9.5 percent of family income. The affordability criterion is based on the cost of single coverage, even if the employee has a family.

An estimated 19 million uninsured Americans will remain ineligible for Medicare or subsidies, and are 'left behind' by the ACA.

Consumers and Employers Face a Steep Learning Curve

Early in the enrollment period, it became clear that confusion about the law and gaps in Americans’ health literacy raised questions about American’s readiness to sign up for insurance. A RAND survey found that in a nationally representative sample, roughly half of respondents lacked sufficient understanding of insurance or the law to navigate the exchanges. This was particularly true among the poor, who are the most likely to be uninsured and to benefit from coverage options under the ACA. Focus groups conducted in Colorado identified a series of barriers among those who were eligible to sign up but who had chosen not to enroll in the new individual marketplace. These include a lack of information about health insurance and low health literacy, in addition to issues with the cost of coverage.

Those who did acquire coverage faced challenges translating their new benefits into access to health care. To help the millions of newly insured get care, a RAND team worked with researchers from the MITRE Corporation to help the Centers for Medicare and Medicaid (CMS) develop tools to help the newly insured understand their benefits and connect to primary care. The core tool is a “Coverage to Care” roadmap that provides step-by-step, easy to understand instructions for choosing a doctor and provides information for community organizations and providers looking to support the newly insured as they connect to care.

Small firms, too, face challenges in obtaining coverage for their workers. To help employers select high value health plans for their workers, the ACA requires that health plans disclose important information to employers about insurance benefits and coverage. Employers can face a steep learning curve in parsing all of this information. A RAND team assessed the tools and metrics available to help guide employers through this information and to make informed choices about health plan selection.

The ACA Does More Than Expand Insurance Coverage

The ACA goes well beyond insurance expansions.

It takes a number of steps to reduce costs and improve health care delivery, including:

  • Medicare Reforms That Reduce Payments to Providers. One of the ACA’s strategies for cost containment involves cutting prices that Medicare pays to most medical providers. Evidence shows that these cuts are having an effect. They are reducing Medicare spending growth and beginning to exert a spillover effect on private sector health care spending as well.
  • Experimental Activities to Test the Cost Effects of Alternative Payment Approaches. The ACA calls for greater emphasis on paying for care based on value instead of volume of services. New programs are advancing value-based purchasing (VBP) across a range of settings. A RAND study assessed the state of knowledge in this area and identified key knowledge gaps in order to help federal policymakers implement and scale up VBP programs and set realistic goals for defining their success.

As implementation of the ACA proceeds, RAND Health Care continues to monitor the evolving policy environment and to track the law’s effects on costs and coverage at the national and state levels.