Nova workboard

a blog from young economists at Nova SBE

Affordable Care Act: A necessary reform

The healthcare debate in the United States is an old one that extends for more than a century. The greatest changes came in the Johnson administration when Medicare and Medicaid were instituted, respectively, insurance for seniors paid for by a federal employment tax and a program of insurance for the poor managed together by the federal government and the individual states.

In 2009, according to World Bank statistics [1], the U.S. had the highest healthcare costs relative to the size of the economy in the world, despite an estimated 15.6% of its population lacking insurance. Given this scenario a healthcare reform was badly needed.

The law is quite complex, as are the problems it intends to tackle, but it can be summed up as way to expand the insurance market to those that don’t have access to it and a way to control healthcare costs.

It expands coverage by requiring insurance companies to cover people they would otherwise reject (such as those with preexisting conditions) and requiring them to offer similar premiums to similar individuals based on a community rating. Individuals will acquire their insurance through health insurance exchanges and there is an individual mandate that requires individuals to buy health insurance or pay a fine. This individual mandate is the source of much of the controversy surrounding the law, however it is absolutely necessary otherwise there would be a risk of premiums going through the roof due to adverse selection, that is, only risky and sick applicants would enroll since they cannot be rejected and healthy individuals would not enter the market since they would feel no need to buy health insurance.

In addition to this changes the law expands Medicaid coverage and includes subsides to those with income below a certain threshold in order for them to be able to afford health insurance in the new exchange system. To pay for this changes, as well as to reduce healthcare costs, some new taxes will be levied, for instance, a tax on so-called “Cadillac health plans” which consists on plans that have a large coverage with small or no co-payment by the patient and which lead to an over demand for healthcare.

Regulation of the insurance industry has also been tightened, for instance, insurance policies need to have a minimum quality standard and companies will have to spend 80% to 85% of their premium collection on healthcare expenditure.

Taken as a whole this reform will increase insurance coverage in the population and, according to estimates by the Congressional Budget Office, will increase the sustainability of government’s expenditure in the health sector.

 

 

[1] http://www.who.int/whosis/whostat/2009/en/index.html

 

Jorge Santos nº 616

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Author: studentnovasbe

Master student in Nova Sbe

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