Effects of the Affordable Care Act

The following sample Economics essay is 3561 words long, in APA format, and written at the undergraduate level. It has been downloaded 669 times and is available for you to use, free of charge.

As of October 1, a new provision of the Affordable Care Act (the “ACA” or the “Act”) has gone into effect: Open Enrollment for individuals and small businesses on Health Insurance Exchanges has begun. This new law—nicknamed ObamaCare by the political right—has already had and will continue to have a profound affect on the U.S. economy in both the short- and the long-terms. While some of its effects may be unforeseen or unintended consequences that will emerge sometime in the future, many of its ramifications can be anticipated ahead of time.

Critics of the ACA claim it will have extremely detrimental effects on American business and on the American economy as a whole, while advocates have claimed it will actually improve the country’s real GDP in a significant way, which—in turn—will lead to an increase in the average income of U.S. families (Council of Economic Advisers, 2009, p.1). With health care costs equaling about 17 percent of the U.S. economy—by far the largest amount of any country in the world—the bill’s supporters have claimed that it will slow the speed of that growth to a more reasonable rate (Gruber, 2011, p. 3). This paper will consider projections made by both sides related to the potential effects of the ACA on: the U.S. economy as a whole, state budgets, U.S. businesses, the health care industry, and American families. Many of the effects will be overlapping and will affect more than one element of the list. Some of the effects could also become synergistic and increase the overall effects. In order to understand how each entity might be affected, a discussion of pre-reform conditions necessarily will be presented in contrast to the possible future landscape of the economy and the health care industry under the ACA.

Effects of the ACA on the U.S. Economy

According to the Council of Economic Advisers of the Executive Office of the President, the rate of growth of health care costs as a percentage of total U.S. GDP has been increasing at an unsustainably high rate (Council of Economic Advisers, 2009). If that rate of growth continued to increase along its forecasted trajectory, by 2040 health care costs would equal 34 percent of the country’s GDP. By slowing the rate of growth of health care costs, standards of living would increase in proportion to the efficiency gains that would result from reallocating resources that could be redirected toward producing other goods or services. Reducing health care costs—which are paid in part by the federal government out of its budget—reduces the federal deficit (assuming the amount saved is dedicated to deficit reduction). This would contribute toward a healthier U.S. economy. The increase in national saving increases capital formation.

The CEA concludes that “properly measured GDP could be more than 2 percent higher in 2020 than it would have been without healthcare reform and almost 8 percent higher in 2030. The real income of the typical family of four could be $2,600 higher in 2020 than it otherwise would have been and $10,000 higher in 2030. And the government budget deficit could be reduced by 3 percent of GDP relative to the no-reform baseline in 2030” (Council of Economic Advisers, 2009).

It goes on to assert that reducing health care costs would lower unemployment and raise employment in the short and medium runs. With cost growth containment of health care, the economy can operate at a lower level of unemployment (possibly lower by one-quarter of a percentage point) without triggering inflation (Council of Economic Advisers, 2009).

Expanding health care coverage would also have a positive effect on the U.S. economy. When comparing the cost of insuring the unemployed with the associated increase in economic well-being, it is thought that the benefits—such as longer life expectancy and reduced financial risk—if expressed monetarily, outweigh the costs. The CEA suggests this could represent increases of about two-thirds of a percent of GDP per year.

If more people are healthy and able-bodied, there would likely be an increase in the labor supply. This could translate into a reduction in disability and absenteeism in the work place—both high costs to businesses. An increase in labor supply tends to increase GDP and reduce the budget deficit.

The labor market would be less constrained by health care coverage options. This would free up workers to switch jobs more readily and more easily, allowing for natural improvements in efficiency within the labor market. Additionally, there would be less of an incentive for workers to work for large companies, which in the past could more easily provide generous health insurance coverage. This would level the playing field for all companies, allowing talented laborers to move more easily at will to the companies that best fit their skills and needs. All of these effects of the ACA would contribute to a healthier, more robust U.S. economy.

Effects of the ACA on State Budgets

The ACA provisions provide that for the first several years of its implementation, the federal government will supply the majority of the funding needed to implement the reform. States are concerned, however, that once the allotted time period for federal government stewardship as dictated by the Act is over, it will foist the program—and its associated costs—onto the states and will then wash its hands of all responsibility. Understandably, states are concerned about their responsibility to their own citizens and taxpayers and are skeptical of plans that originate in Washington and then trickle downstream.

The responsibilities created by the reform include those associated with coverage expansion. For the first 10 years or so of the new Act, the federal government will assist with coverage expansion costs by utilizing enhanced Federal Medical Assistance Percentages (FMAPs) for those who are newly eligible. FMAPs are used to determine the amount of federal-matching funds for state Medicaid medical and medical insurance expenditures. By enhancing these numbers, the federal government will be paying a larger share of the Medicaid costs of these newly eligible enrollees.

Responsibilities also include a reduction in Medicaid Disproportionate Share Hospital (DSH) payments, which go to hospitals that provide treatment to indigent patients. The ACA reduces this type of funding partly because it expands health care coverage for the poor, including preventative care. The Act was designed to create incentives for the health care system to improve and expand preventative care. This should help reduce the burden placed on the system when indigent patients—who delay having treatment until their conditions turn into emergency situations—are forced to resort to the much costlier alternative of urgent care at hospitals. It is thought that preventing or treating chronic conditions in a more proactive manner will save the system the enormous costs associated with the more expensive care that is needed once those conditions worsen and become exacerbated by lack of treatment. These costs are avoidable. If the costs associated with indigent patients receiving treatment at hospitals do not go down, states will be responsible for picking up the tab.

Another responsibility created by the provisions of the ACA is the creation of state basic health programs for the expansion of coverage. The Act currently provides that 95% of the tax credits and cost-sharing benefits that individuals would have received had they enrolled in an exchange will be transferred to the states. The new infrastructure required by the provisions of the ACA will have to be funded by the states: there was no funding provided for personnel required for running new or expanded programs. The Act does, however, provide grants for establishing the exchanges, themselves. The Act also does not provide funding for the redesign of current programs to bring them into compliance with the new regulations contained in the Act. Those costs will have to be borne by the states. Funding is provided, however, for community transformation grants and grants for medical homes.

It is thought that one of the largest costs of the reform will come in the form of an increase in Medicaid enrollment. Currently, a fairly large percentage of people who are qualified to receive Medicaid benefits from the government are not enrolled in the program. By requiring every American to have health care coverage of some type or to face a penalty, those people who already qualify for Medicaid but haven’t enrolled will be compelled to enroll. Because the majority of the funding for Medicaid programs comes out of state budgets, states are understandably concerned about the economic effects the expansion of Medicaid coverage will have on their fiscal stability—especially as they attempt to recover from the recession.

There are other provisions of the ACA that will affect states as well, including the administration of the new health insurance exchanges, insurance premium oversight, and employee benefit changes such as instituting mandatory fitness programs—among others—but according to a study conducted by Deloitte Center for Health Solutions (2011), those provisions will not have a significant impact on state economies.

Interestingly, Deloitte created three separate forecasting models to predict the possible effects of the ACA on states. In the most optimistic scenario, states actually saved money—at least in the short term—through the implementation of the ACA’s provisions. The moderate model ended up with a break-even outcome for states, while the most pessimistic model resulted in moderate increased costs to the states.

While it is understandable that states would be nervous about the affect of the Act on the long-term fiscal health of their economies, it remains to be seen whether or not implementation will actually cost states more than they already would have paid on health care.

Effects of the ACA on U.S. Businesses

As far as immediate implications for American businesses go, according to the Health Policy Center of the Urban Institute, “the ACA’s requirements have a negligible impact on total employer-sponsored coverage and its costs” (Blumburg, Buettgens, Feder, & Holahand, 2012, p. 1). In fact, large-sized business costs will likely be about the same amount per person for health insurance coverage as it would have been without the ACA going into effect. The health insurance options they offer won’t change much as a result of the Act. Small businesses will likely pay less per insured person under the Act. Only mid-sized firms—those with between 101 and 1,000 employees—will see direct and immediate higher costs per insured person, mainly for those companies that did not offer insurance before.

Small businesses—with fewer than 50 workers—are exempt from ACA coverage penalties and might be eligible for premium tax credits, easing whatever burdens might have been associated with offering coverage to employees. Large businesses—with more than 1,000 employees—will continue to pay approximately the same amount on health coverage per person. When there are slight increased costs for large businesses, these are associated with the slight increase in enrollment numbers for offering coverage to the small number of employees who are not currently covered.

It is medium businesses that will be affected most by the ACA by being assessed penalties if they don’t currently offer insurance and the expansion of whatever coverage they currently have to extend to a larger number of employees. While there may be some minimal short-term tightening of belts in some mid-sized U.S. businesses, there will be long-term positive effects that will come from a stronger U.S. economy and from employees who receive proper preventative health care and are, thus, more productive workers who need fewer sick days.

Effects of the ACA on the U.S. Health Care Industry

Health care costs as a percentage of a country’s GDP are higher in the U.S. than in any other country in the world. According to the Council of Economic Advisers, inefficiencies in the U.S. health care system are partly to blame for pattern of rapidly increasing health care costs in the country. Its analysis found several design flaws in the pre-ACA health care industry. The system monetarily rewards for medical inputs rather than health outcomes. Administrative costs are excessive. There is insufficient focus on preventative medicine.

Perhaps one of the most senseless burdens on the health care industry in recent years has been the increasing cost related to delayed treatments and improperly maintained treatments for chronic conditions. This is caused—at least in part—by the high percentage of people who do not have health care coverage. This population is more prone to delay treatment for as long as possible because they are trying to avoid unnecessary costs. They omit preventative care, so—oftentimes—a chronic condition that could easily and cheaply be treated and managed with a minimal amount of time, expense, and suffering is left to develop into a much more serious problem, requiring much more expensive treatment. This type of patient is prone to wait until their condition turns into an emergency, at which time they are treated at a hospital.

In addition to hospital facilities being more expensive than a regular doctor’s office, in part because of overhead costs, the treatment required for the more serious condition is often much more extreme and much more expensive. The recovery costs the patient money and time that would not have needed to be spent. Interestingly, not only does this create a burden on the health care system, it creates a burden on the entire U.S. economy. Even a temporary loss of a portion of the workforce due to lengthy recovery times needed because of serious procedures is a drag on the economy. It costs businesses in the form of sick days, reduced resources, and unnecessary inefficiencies.

The ACA is looking to transform the way the health care industry evaluates treatment of patients in part to reduce those needless burdens on the system created by the under- or uninsured. By requiring health care insurance for every citizen and providing it for those who cannot otherwise afford it, the Act aims to increase preventative care and thus reduce the need for expensive, emergency treatment.

Health care exchanges, themselves, should help improve health care efficiencies as well. It is thought that the exchanges will increase transparency and promote competition among insurance companies, thus forcing them to improve service and reduce costs, where possible, in order to attract customers and to earn a margin (Health Research Institute, 2011). It is thought that applying this pressure on insurance companies will push them, in turn, to apply pressure on doctors to keep cost in mind when making treatment decisions. This is not to say that the Act will encourage doctors to give subpar treatment in order to save the insurance companies a few bucks. But, hopefully, all decision makers in the system—from the doctor to the patient to the insurance actuary—will be mindful of cost as they weigh the differing options.

Additional cost containment provisions written into the ACA, which should reduce overpayments and reward innovative delivery systems, will also create a health care system that is more streamlined and efficient (Blumberg et al., 2012). These savings should be seen in both the private and public sides of the health care industry, as insurance companies compete to attract and keep customers.

Effects of the ACA on the American Family

Some estimates state that without the ACA, 19.6 percent of the population would be uninsured by 2016, while predictions put the number under the ACA closer to 8.2 percent (Eibner et al., 2013).

By this point it should be clear that—to a certain extent—these categories of effects are not discrete. What is good for the U.S. economy can be good for the American family. What is good for the American family can also be good for the U.S. economy. Many of the positive implications of the ACA bleed over between categories. The section about the U.S. economy, for example, stated that “[t]he real income of the typical family of four could be $2,600 higher in 2020 than it otherwise would have been and $10,000 higher in 2030” (Council of Economic Advisers, 2009). This type of effect very directly means additional dollars in the coffers of an American family, money they can save for the children’s educations or money they can invest for retirement. When the U.S. economy is healthy and robust, American workers are less constrained from switching jobs because of health care implications, total health care spending is contained, and Americans are receiving high quality preventative health care at affordable prices, everyone benefits.

Health coverage is often one of the elements of employee compensation packages. Approximately 60 percent of individuals under the age of 65 have some type of employer-offered health insurance. Recently, the premiums of insurance programs offered through employers have gone sky high. This expense can be crippling for a household.

From 1996 to 2006, average premiums for employer-sponsored insurance programs increased from $6,462 to $11,941 (in 2008 dollars), and increase of 85 percent in real terms (Council of Economic Advisers, 2009, p. 3). If they continue to increase at current rates, premiums will reach $25,200 in 2025 and over $45,000 in 2040 (in 2008 dollars).

Perhaps even more startling is that in addition to higher premium costs, economists posit—based on empirical evidence—that workers end up paying for the increasing costs of health insurance through lower wages (over the long run). If you consider that the cost of insurance premiums is increasing at a faster rate than income is increasing, it follows that the percentage of income needed to cover the insurance premium is increasing. Thus, the amount of income left over for the family is a smaller piece of the total income pie (Council of Economic Advisers, 2009, p. 4).

For those households who must buy individual health insurance coverage, the ACA includes new regulations that preventing insurance companies from penalizing those with preexisting health conditions. This will have very real implications for American families and the well-being of their households. These regulations require insurance companies to offer health insurance to everyone who requests it. Additionally, they are only allowed to vary prices based on a few factors, including: age, tobacco use, geographic location, family size, and the actuarial value of the plan (Eibner et al., 2013, p. vi). This might allow those households who are not offered employer-sponsored health care benefits—especially those with preexisting conditions—to purchase nongroup insurance at a more affordable rate. Currently, nongroup health plans charge exorbitant rates and refuse to cover anything it deems to be a preexisting condition. For those with chronic conditions—this can mean the insurance, itself, is no longer valuable enough to be worth purchasing at such high premiums. It is often the chronic condition that the customer wanted or needed to get covered in the first place.

With the fear of losing medical coverage necessary to treat preexisting conditions, many people are compelled to stay at unfulfilling jobs simply in order to retain health insurance coverage for themselves and their loved ones. This type of constraint on labor talent and skill is not good for the economy as a whole, it’s not good for businesses, and it can be devastating to family lives. Robust and efficient economies rely on the freedom of movement of skilled labor between job types and between companies. Perhaps, the ACA will have the effect of equalizing opportunities for workers among a great variety of jobs at a great number of companies. This could allow for a higher level of satisfaction on the job, which can translate to happier, healthier households. Additionally, potential employees might be able to give small businesses more of a chance when weighing job opportunities. If small businesses are able to attract higher quality talent, it can lead to greater small business success in the economy.


As stated many times throughout this paper, the ACA will affect many different segments of the U.S. in different ways. It can lead to a smaller government health care spend and, thus, a more robust U.S. economy. It can lead to savings at the state level. It can save businesses money, and even in businesses that might be immediately affected by higher rates, the improved economy and improved health of employees might add more benefit than it costs. The health care industry will be able to move toward a more transparent, efficient model, with more of a focus on preventative care. And American households might be able to keep a larger piece of their income pie for investing. All of these different segments can potentially affect each other in synergistic ways. In short, if implemented well and with buy-in from all actors, ObamaCare just might help revitalize an ailing economy.


Blumberg, L. J., Buettgens, M., Feder, J., & Holahan, John. (2012). Implications of the Affordable Care Act for American business. Washington, DC: Urban Institute Health Policy Center.

Council of Economic Advisers. (2009). The economic case for health care reform. Washington, DC: Executive Office of the President.

Eibner, C., Cordova, A., Nowak, S., Price, C., Saltzman, E., & Woods, D. (2013). The Affordable Care Act and health insurance markets. Washington, DC: RAND Health.

Gruber, J. (2011). The impacts of the Affordable Care Act: How reasonable are the projections? Cambridge: National Bureau of Economic Research.

Health Research Institute. (2011). Change the channel: Health insurance exchanges expand choice and competition. Washington, DC: PriceWaterhouseCoopers.