After Nine Years

It may not seem like that long ago, but it has been nearly nine years since the initial passage of the Affordable Care Act (a.k.a. Obamacare). However, there are many misconceptions which some Americans still have about the design and effects of said healthcare law.

With the registration period on the ACA’s Marketplace (click here to see how you can be covered) ending on December 15th, now would be an excellent time to go over the basics of the ACA.

Like any major piece of legislation, trying to understand the healthcare law can be intimidating at first. However, the law’s core components are actually rather simple, as they involve the basic concepts of insurance which many Americans are familiar with.

Thus, the three provisions of the ACA which we will look at are: protections for people with pre-existing conditions, the individual mandate, and health insurance tax credits. Understanding the role of each of these components is key to understanding the ACA.

Protections for the Sick

A person with a pre-existing condition is, simply put, someone with any sort of medical ailment. Health insurance companies are incentivized to not cover people with pre-existing conditions, and the reason for this is obvious.

For insurers, profits are higher when they have a healthier pool of people to insure - i.e. people without pre-existing conditions. Therefore, companies are incentivized to maximize the amount of healthier, younger people in their pools, and to minimize the amount of sicker, older people.

In the years before the passage of the ACA, insurers did just this, through rejecting many applicants for coverage who had pre-existing conditions. They also were allowed to charge those with such conditions higher premiums, and sell “thinner” coverage plans which did not actually cover such ailments.

In 2014, a provision of the ACA which barred companies from turning people away because of their medical condition kicked in, and the above behavior from insurance companies largely ceased. However, this raises an obvious question: how do insurers stay in business?

If companies are forced to cover more people than they can afford to, they will ultimately cease to operate. To prevent this from happening, we turn to another ACA provision: the individual mandate.

A Mandate for the Healthy

Younger and healthier people are less likely to need healthcare services, and thus are less likely to purchase insurance. However, these are precisely the people insurance companies like to cover the most, as they are less costly.

Once the ACA required that insurers cover people with pre-existing conditions, the only way for insurers to stay in business would be to have an influx of healthier, easier to cover people to balance out the sicker enrollees. However, such people are unlikely to purchase insurance on their own, which is where the individual mandate comes in.

The individual mandate is simple: Americans who are currently uninsured must purchase health insurance, or pay a fee for not doing so. It is through this mandate that the ACA ensures stability in the market: companies must now insure the ill, but can afford to do so because they have more healthy people in their insurance pools.

There is balance.

However, there is just one issue with this plan as is. What if those who are now mandated to buy insurance cannot afford to do so? To answer this, we turn to the third main component of the ACA: health insurance tax credits.

Aid for the Poor

In order to help those who are too poor to afford insurance, the ACA provided for insurance premiums to be subsidized through tax credits.

Here’s how they work: enrollees are required to pay a portion of their premium based on their respective income, up to cap. The government then covers the remainder of the cost. As an enrollee earns more, they are required to cover a greater portion of their premium, until they are no longer subsidized at all.

It is worth noting that their are individuals who earn too little to qualify for the subsidies (these people were expected to be covered under a Medicaid expansion, another aspect of the ACA). There are others who earn too much to qualify for the subsidies, but nonetheless still struggle to pay their premiums and comply with the mandate (Barack Obama himself actually admitted that the subsidies should have been set at higher levels).

The Big Picture

So those are the basics!

The ACA requires that insurers cover more sick people, and mandates that all individuals (particularly the young and healthy), purchase health insurance so insurance companies can do so. These individuals are subsidized so they can afford insurance.

This piece may have given the impression that all Americans are covered through the ACA. However, this is far from the truth. Most American citizens are covered through other means, and many are not covered at all. But it is individuals who earn too much to qualify for Medicaid, and who do not have insurance through employment or other means, which the Affordable Care Act sought to help. Hopefully, this piece provided a basic framework for how the ACA accomplishes just that.

And remember, if you need health insurance, make sure to sign up!