ACA Evaluative Paper Kiarash P. RahmanianUF ID: 9011-8942

A. Statement of ACA provision #1 that addresses the health insurance marketThe ACA provision of exchanges will provide healthcare for those that are uninsured and

decrease the national healthcare expenditures for the U.S.

B. Statement of the market failure that this specific provision is addressingThe market failure that this provision is addressing is missing markets. Specifically, there is

no market for multiyear health insurance contracts that would protect individuals throughout their lives from the risk of becoming sick and having to pay much higher insurance premiums or lose their coverage entirely. The missing market problem contributes to multiple inefficiencies. Individuals with high medical spending may be “locked in” to a policy for fear that their premiums will increase if they change their coverage, particularly in the individual market. The decision not to seek new coverage may reduce competition in health insurance markets. Labor markets too suffer negative consequences when workers who want to change jobs stay in their old jobs for fear of losing insurance.

C. Discussion of the economic theory explaining how ACA provision #1 addresses the identified market failure (e.g. if the provision is addressing an externality, explain what the externality is, how the externality results in non-optimal outcomes, and what the provision does to address or counteract the externality)The Affordable Care Act extends insurance coverage to the uninsured and makes insurance

markets work more effectively for those who already have coverage. To achieve these goals, it establishes Health Insurance Exchanges, organized marketplaces in every state that enable individual consumers without access to affordable employer-sponsored coverage to shop easily for coverage and receive any tax credits or reduced cost sharing, for which they are eligible. The Affordable Care Act also establishes Small Business Health Options Program (SHOP) Exchanges, similar marketplaces in each state for small group coverage. Private insurance companies will offer plans for sale through the Exchanges beginning in 2014. Beginning in 2017, states can choose to expand their Exchanges to larger employers as well.

The ACA provision of exchanges will allow for those without insurance to become insured. Alongside the individual mandate provision of the ACA, this provision provides an outlet for consumers to purchase qualified coverage. The idea of universal healthcare coverage will aid in lowering the overall healthcare expenditures of U.S. consumers. The reason for the growth in healthcare expenditures is because a consumer doesn’t pay the full price for healthcare and they will use that service more often due to not seeing the full price. This increases the demand for health care. The declining demand curve will be higher demand at a lower price. The higher price is for an uninsured individual, whereas the lower price is for an insured individual. The insured demand curve will have a steeper slope and will shift out from the “uninsured individual’s” demand curve. This means that the consumer is less responsive to price changes. Prices increase when you have more demand, hence the increase in healthcare expenditures. The study by Hadley and Holahan (2003) simulated projected health spending if Medicaid or private insurance covered all uninsured consumers. This study showed that we would get a return on our investment if we insured everyone (universal health insurance).

ACA Evaluative Paper Kiarash P. RahmanianUF ID: 9011-8942

A. Statement of the ACA provision #2 that addresses the health insurance marketThe second ACA provision of guaranteed issue, which prohibits insurers from denying

coverage to anyone who wants to buy it, aides in addressing the health insurance market. The law also prohibits insurers from charging higher premiums for individuals in poor health.

B. Statement of the market failure that this provision is addressingThe market failure addressed here is adverse selection. Adverse selection means that

individuals or families with worse health and thus higher anticipated medical expenditure are more likely than their healthier equivalents to buy insurance coverage at a given price. This makes it difficult for insurance firms to foresee costs and establish prices based on those predicted costs. Also, individuals who desire the most health care coverage tend to be the least healthy, whereas healthier people tend to need lesser healthcare coverage. Because some healthy people opt not to have healthcare coverage, the average price of insurance increases because those now in the insurance pool are less healthy. Rising costs push more people out of the market for health insurance because they believe the costs of insurance exceeds the benefits. The end result is that many individuals, some by choice and some due to cost, will not have health insurance. In addition, even if both parties are informed about health status, people who have preexisting conditions or other characteristics that make use of health care more likely (those of older age) may not have, or be able to afford, health insurance. Individuals could be limited in their facility to pay for health insurance due to low incomes. In this instance, a lack of individual health care coverage can still create the same negative effects that spillover in other areas of society.

C. Discussion of the economic theory explaining how ACA provision #2 addresses the

identified market failureCorrecting this market failure requires changing the current practices of both insurance

companies and consumers. This is where the ACA provision called “guaranteed issue,” comes into play. This provision prohibits insurers from denying coverage to anyone who wants to buy it. The law also prohibits insurers from charging higher premiums for those with poor health. For the consumers, if they can afford coverage they are required to have coverage or pay a penalty, except for specified exemptions. Any incentives that insurers may have to try to attract healthier consumers will be offset through risk adjustment that transfers payments from insurers with relatively healthy enrollees to those with sicker enrollees. This framework largely solves the adverse selection problem.

Countless types of risk-pooling mechanisms have been created to reduce the negative externalities associated with the private healthcare market. Medicare has addressed the problem of adverse selection among the elderly, and employer-sponsored health insurance (ESI) has significantly reduced this problem among the employed population. Some states also limit variations in premium costs. In addition, ESI provides a pooling mechanism that is unrelated to health factors and thus addresses both the adverse selection issue and the problem of being “locked out” of the market for those with poor health. ESI also tends to reduce administrative costs compared with such costs when individuals purchase coverage on their own. These pooling and administrative advantages are lessened for businesses with few employees.

ACA Evaluative Paper Kiarash P. RahmanianUF ID: 9011-8942

A. Statement of the ACA provision #3 that addresses the health insurance marketThe ACA provision of consumer protections will allow for the consumers to make the most

informed decision they possibly can.

B. Statement of the market failure that this provision is addressingHealth insurance markets are defined by their high cost to consumers, who have to search

for the best potential price in order to attain the best deal on their insurance. Without assistance or support, consumers are expected to gather and evaluate comparative information on the prices and quality of the vast array of intricate health insurance plans. The excessive cost of managing that search reduces competition and may result in prices that are higher than those that are at a competitive level. An effective strategy to reduce these search costs is using information systems that will assist the consumers to do comparison shopping. For example, in the life insurance market, as the use of price comparison websites became greater the reductions in premiums and gains in consumer surplus increased substantially.

C. Discussion of the economic theory explaining how ACA provision #3 addresses the identified market failureConsumer protections, in the form of the online choice tool, aid in addressing the market

failure of not providing the consumer with all of the information in order for them to make the most informed choice in terms of their coverage. The ACA provision established an Internet website to help consumers identify health coverage options and develop a standard format for presenting information on coverage options. The online choice tool was developed to put into place a set of standards for insurers to use in providing information on benefits and coverage. This tool will enable the consumers to choose coverage based on the characteristics of health insurance plans that best suit their needs and preferences (for example: premium costs, cost-sharing, or plan quality ratings). One particular online tool is the HealthCare.gov Web portal. In 2014, Exchanges leveraged these technologies to allow consumers to make informed choices among the vast array of health insurance plans.

The ability to have access to comparative evaluation of all possible insurance plans allows the consumer to make the best possible choice in terms of their plan. From an economical theory standpoint, one of the 5 Assumptions for a perfectly competitive market states that consumers should have perfect information about a product or service. In the case of health insurance, they do not. If they think that the product is high quality, the will be a higher demand and vice versa. In the healthcare insurance industry, the consumers do not have access to all of the information about the products and services, hence the need for government regulation (ACA). This is called asymmetric information, where the consumers and insurers have different information. For instance, a Doctor knows more than the patient (about the options, efficacy of the options, diagnoses, etc). The patient might not know if they really need a procedure or test. The way in which this is an example of market imperfection is through externalities. The reason that Doctors or the healthcare insurance companies do not want universal healthcare insurance is that their personal interests of overcharging or unnecessary procedures and exams are lining their pockets. Therefore, because of asymmetry of information, physicians could theoretically induce demand (principal-agent theory).

ACA Evaluative Paper Kiarash P. RahmanianUF ID: 9011-8942

A. Statement of the ACA provision #4 that addresses the health insurance marketThe ACA provision of employer requirements will be able to create a more competitive

market that does not put entirety of the consumer power with the larger companies in the industry.

B. Statement of the market failure that this provision is addressingMost employers in the U.S currently offer health insurance to their employees. The

numbers show that 95% of employers with 50 to 199 employees are provided insurance and 99% of employers with 200 or more employees provide insurance based on the Kaiser Family Foundation and Health Research and Educational Trust of 2010. ACA levies financial penalties of $2,000 per full-time worker on the employers with 50 or more workers who do not offer coverage if their workers obtain premium tax credits for the purchase of coverage in an Exchange.

C. Discussion of the economic theory explaining how ACA provision #4 addresses the identified market failureFewer than 10,000 firms, (or 0.2% of American businesses) are likely to be affected by the

hefty $2,000 penalty for employer coverage requirements. Small employers (those with fewer than 50 workers) face no such penalties. On the flip side of the coin, ACA includes a tax credit to help small businesses (those with fewer than 25 full-time workers and average annual wages below $50,000) afford health insurance for their workers. Small Business Health Options Program (SHOP) Exchanges allow small business to join a larger pool of buyers and purchase coverage that has the identical impartial prices and low administrative cost that larger employers have historically experienced. Alongside the SHOP exchanges, this tax credit system will even the playing field for small and large employers in terms of health benefits.

The ability to take away the market power from the larger employers allows the consumers from the smaller employers to gain fair and equal access to healthcare insurance for their employees. From an economical theory standpoint, the market price is lower than what it would be under perfect competition. If there is more competition (in the competitive fringe) the quantity will be lowered, causing the pot to be “shared” more. A larger competitive fringe would cause the price set by the dominant firm to fall as the supply curve shifts to the right. If more fringe companies are willing to take any price, the Supply curve (sloped line upward at Point B) would shift to the right (or out). In a perfectly competitive market, the profit is minimal. But in a marketplace with a dominant firm, they have market power and they set the price, causing the profits to be higher. Having market power also allows insurers to practice price discrimination. Price discrimination is when different customers are charged different prices for the same good. Insurers could do this with the employees from the smaller companies who are not insured.

ACA Evaluative Paper Kiarash P. RahmanianUF ID: 9011-8942

A. Statement of the ACA provision #5 that addresses the health insurance marketThe ACA provision of Medicaid expansion will afford Medicaid eligibility to all individuals in

families with incomes at or below 133% of the Federal poverty level.

B. Statement of the market failure that this provision is addressingExpanding Medicaid eligibility provides a dire coverage option for the citizens that are the

most economically susceptible. ACA also distributes assets to states to counterbalance their auxiliary costs for recently eligible individuals (100% of the costs for the initial 3 years, phasing to 90% permanently thereafter). ACA has also proposed additional resources that will help states design and apply restructured enrollment systems in order to make obtaining health insurance a smooth process.

C. Discussion of the economic theory explaining how ACA provision #5 addresses the identified market failureThe ACA provision of Medicaid expansion will allow for all non-Medicare eligible individuals

under age 65 (children, pregnant women, parents, and adults without dependent children) with incomes up to 133% of the Federal poverty level based on modified adjusted gross income (as under current law undocumented immigrants are not eligible for Medicaid) to become insured. All recently eligible adults are guaranteed a standard benefit package that meets the fundamental health benefits available through the Exchanges. The Supreme Court ruling on the constitutionality of the ACA upheld the expansion of Medicaid, but restricted the ability of HHS to require it, thereby leaving the decision up to individual states. To finance the new health insurance coverage for the recently eligible, individual states will receive 100% federal funding for 2014 through 2016, 95% in 2017, 94% in 2018, 93% in 2019, and 90% for 2020 and subsequent years.

This provision provides an outlet for uninsured consumers to gain healthcare insurance coverage. As with the exchanges provision, the idea of universal healthcare coverage will aid in lowering the overall healthcare expenditures of U.S. consumers. The reason for the growth in healthcare expenditures is because a consumer doesn’t pay the full price for healthcare and they will use that service more often due to not seeing the full price. This increases the demand for health care. The declining demand curve will be higher demand at a lower price. The higher price is for an uninsured individual, whereas the lower price is for an insured individual. The insured demand curve will have a steeper slope and will shift out from the “uninsured individual’s” demand curve. This means that the consumer is less responsive to price changes. Prices increase when you have more demand, hence the increase in healthcare expenditures. The study by Hadley and Holahan (2003) simulated projected health spending if Medicaid or private insurance covered all uninsured consumers. This study showed that we would get a return on our investment if we insured everyone (universal health insurance).