Breaking Down Obamacare: Benefits And Consequences Of The Affordable Care Act

Michael Teague  |

After several years of rancorous and sectarian political wrangling, the Obama administration’s signature health care reform legislation, The Patient Protection and Affordable Care Act, is six months away from full implementation.

For all of its good intentions, such as making better health care coverage available to more Americans for a reasonable price, Obamacare has had a more difficult time than any legislation in recent memory.  Just last month, Republicans in the house voted for the 37th time to repeal the Affordable Care Act, even after last year’s Supreme Court ruling that upheld the constitutionality of one of the law’s most contentious aspects, the mandate that all Americans purchase insurance.

The Basic Framework of the Legislation

The hotly debated “individual mandate” is one of three central aspects of the legislation. The ACA not only requires all individuals to be insured, it also forbids insurance providers from denying coverage or raising premiums based on pre-existing conditions, and subsidizes premiums for individuals and businesses based on income.

The health insurance exchanges that go online in January are where all of this will come together. Providers who wish to operate on the exchanges will be required to offer several tiers of standardized coverage for individuals and businesses, and will be required to present the costs and benefits of their plans in a way that makes it easy for consumers to compare. Costs will in theory be kept lower because the different providers will want to attract as much of the vastly expanded customer-base as they can, and participating states will receive assistance from the Federal government in setting up the exchanges.

Can Premiums be Kept in Check?

Among the many objections that have been voiced to the ACA, one of the most common has been that the law will actually send costs and premiums skyrocketing, because providers will be forced to pick up additional expenses from having to ensure so many people with pre-existing conditions, or who are otherwise aging and thus more expensive to insure. It is feared that this cost would then be unfairly passed on to younger and healthier people who don’t necessarily need as much coverage, but who are being mandated to purchase it anyway.

Preliminary results seem to be at odds with that concern. Several states that have signed up for and begun setting up their own exchanges have thus far seen rates lower than anticipated even by the Congressional Budget Office. In November of 2009, the CBO estimated that the cost for the mid-level or “silver” plan would come with an annual premium of $5,200.

According to premium rates released on May 23 by Covered California, the name of California’s health insurance exchange, however, the silver plan comes in at roughly $3,300 annually, and Federal subsidies are expected to make this a far more affordable price for the 5 million residents of the state that are expected to purchase their insurance through the system. Similar results have been observed in Washington and Oregon, both states that have actively embraced the exchanges.

Inasmuch as California can be put forth of an example of what is to come, it seems as though there is a good chance that health insurance providers will indeed be willing to abide by a level playing field as well as federally induced competitiveness in the market in exchange for a larger pool of paying customers.

Potential Effects on Equities

And it appears as though the stock market would seem to agree. Despite pressure from the expected additional costs under the new provisions of the ACA, the S&P 500 Health Care sector index is up over 27 percent in the past year, and over 18 percent year-to-date, almost doubling the gains of the S&P 500 as a whole in 2013.

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Obamacare has played a role in boosting the sector on expectations of increased volume alone: more patients for otherwise struggling hospitals, more policy holders for insurance companies, and increased sales of prescription drugs are some of the undeniable benefits in this respect.

There are some indications that the ACA is having other, more specific positive effects on the financial performance of the industry as well. In terms of hospitals, the increased efficiency requirements of Obamacare have given rise to a great deal of talk about mergers and buyouts. Some of the nation’s larger hospital companies such as LifePoint Hospitals (LPNT) and Health Management Associates (HMA) have seen stock prices jump on the mere speculation of buyout deals.

Companies that provide outsourced medical staff for hospitals have similarly done well. Tennessee-based Team Health Holdings Inc. (TMH), for instance, supplies emergency room staffing to 800 hospitals has seen shares up nearly 38 percent in 2013, perhaps in anticipation that their services will more or less become an imperative for a great number of the country’s understaffed hospitals.

Short & Long-Term Cost Reduction

But irrespective of cost-cutting benefits in the short-term, the law also sees a long-term benefit by its emphasis on preventive care, and this is not often factored in to a great deal of the more heated and vociferous opposition to the ACA.

In theory, at least, forcing more people under the age of 30 into the health care system will not only even out the expenses incurred by the elderly, or those with pre-existing conditions, it will save money by detecting medical problems before they become serious and much more costly to treat. Naturally, this aspect of the ACA, while potentially extremely significant if indeed it works out according to plan, is the hardest one to sell as it promises advantages that can only be realized farther into the future.

Consequences for Small Businesses

As for the 27 states that have opted out of setting up their own exchanges, or setting one up in partnership with the Federal Government, residents will have access to an exchange orchestrated solely by the Federal Government if they so choose. And while much of the refusal to participate in the program has undoubtedly been ideological in nature, there are still legitimate concerns about the impact of the provisions of the ACA on employers, and in particular small businesses.

Just as the ACA compels individuals to pay penalties for not purchasing coverage, businesses are subject to similar mandates.  Businesses that employ 50 or more workers who are on the job 30 hours a week or more will be required to provide health care or pay a fine and there have been indications that smaller businesses have already frozen hiring or cut back on worker’s hours to avoid the new requirements.

For the time being, there is still a great deal of uncertainty about how the ACA will work out for certain businesses with around 50 workers, and how they will react to the new regulatory landscape set in place by the law. Employees who have their hours reduced, however, in anticipation of mandates on businesses will be eligible for individual insurance and will be incentivized by tax credits if they are not eligible for Medicaid, and if their incomes are between 100 percent and 400 percent of the federal poverty level, that is $45,960 for a single individual and $94,200 for a family of four.

Wait and See

Certainly, it appears likely that a certain number of individual workers and businesses could be caught up in the grey area surrounding the 50 employee limit of the law. In other words, some workers might be stuck without a health insurance plan from their jobs, but will still make too much money to qualify for subsidies. Some employers, on the other hand, will have to pay fines even though the health plans they will be required to provide for their employees might also be beyond what they can reasonably afford.

Thus, the positive effects of the ACA are already being hinted at by the rates recently released by Covered California, for example. At the same time, there is uncertainty about the potential to dump onerous and prohibitive costs on smaller businesses, and some legitimate worry about the consequences of these enterprises attempting various means of avoiding the legislation altogether.

This “wait and see” aspect of the potential benefits of the ACA, even more than the most fanciful and conspiratorial objections to the law or the relative inability of the White House to control the narrative about its signature legislation, seems to be what has many on edge in terms of the outcome of such a wide-spread restructuring of how health care works in the United States.

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