"OBAMACARE AND BEYOND": AN ANALYSIS OF HEALTH CARE COVERAGE IN THE UNITED STATES
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“OBAMACARE AND BEYOND”: AN
ANALYSIS OF HEALTH CARE COVERAGE
IN THE UNITED STATES
Department: Economics
By Rio DhatINTRODUCTION
The health care system in the United States encompasses so many individuals,
businesses, and interest groups, that it can be difficult to pinpoint the most optimal approach to
serve everyone’s unique needs and wants. An effective policy response must focus on what is
most enriching for the majority: aiming to improve the overall quality of the system and
positively impact the health status of all citizens, while subsequently minimizing costs. The
current organizational structure has clear failings that contribute to a delivery system that lags
behind many other industrialized nations who exhibit a larger amount of state assistance to their
citizens; showing that it is possible to intervene in health care and still maintain a high level of
quality.
With spiraling expenditures and numerous market distortions affecting the health care
system in America, there seems to be consensus that some amount of change in the insurance
coverage structure is essential. Concerns centered on adverse selection, where overall premium
prices are driven up because of a lack of participation in the market, lie at the heart of the
discussion, and increasing the number of covered individuals from current levels of 83 percent
can attempt to overcome such issues (U.S Census Bureau, 2011). Although there are many
considerations to be made in such a substantial reform, a key aspect of the discussion revolves
around the nature of health care: is it a right, or a privilege? While striving to answer that vital
question, this essay will focus on the government’s responsibilities to its citizens, the merits of
President Obama’s “Affordable Health Care Act”, and consequently the impacts of potential
intervention on the health care market in terms of cost, quality, and overall economic impact.
1THE NEED FOR REFORM
Before the Affordable Health Care Act was established in 2010 and state assistance for
citizens was relatively low, the United States lagged significantly behind all major OECD
nations in key health care indicators, also having the highest amount of expenditure on health
care as a percentage of gross domestic product (WHO, 2013). These results paint a harsh picture
of the health care system in the United States, and contribute to a feeling that change is
imperative. Additionally, as virtually all of these higher-ranking OECD countries provide
universal health care, while also having lower expenditures, it raises the question of why the U.S.
does not participate in a similar type of system, or at least take some aspects of the alternative
market structures prevalent in high-performing nations.
Table 1
Source: OECD Health Data 2012
2KEY CONCERNS
An investigation into the nature of the issues and market failures that befell the health
insurance market prior to the implementation of the Affordable Health Care Act can portray the
limitations of having a largely private marketplace for health care coverage. Adverse selection,
the inflexibility of the market, and negative externalities caused by large numbers of people
without health insurance can be seen as the main problems affecting the industry. These issues
have led to increasingly high expenditures and market distortions that have negatively impacted
the quality of care in the health system.
Firstly, adverse selection caused by asymmetric information is a considerable problem in
the individual insurance market. Because individuals know more about their health status than
insurers (asymmetric information), inefficient, “risked-based sorting” (Cutler and Zeckhauser,
1997) plans prevail, making it difficult for healthy people to achieve reasonable rates (adverse
selection). This undesirable result arises from the fact that many individuals who are currently
healthy will not buy insurance, but in contrast, sick individuals will often purchase coverage
plans. Consequently, when people with a higher likelihood of becoming sick purchase
insurance, their costs and premiums are correspondingly high, which drives up the prices for all
individuals (both healthy and sick). As a result, the price of health insurance a typical person
would face in the individual market greatly exceeds the average cost of covering that individual.
Another significant concern in the health insurance market relates directly to the lack of
flexibility and choice over coverage plans, which gives more control to providers, while also dis-
empowering consumers. To eliminate the market failure that results from a provider-favored
market, efforts must be made to reduce the cost and difficulties with individuals who are
compelled to shop for health coverage. The vast number of current plans in the market can make
3it problematic for low-income individuals with limited education to purchase the most
appropriate form of insurance, and it can be an arduous process for individuals to switch their
coverage. These factors often lead to consumers choosing plans that do not reflect their best
interests, usually involving higher premiums that disadvantage both the individual and the wider
participant pool.
To maintain the U.S’ strong economic standing globally, any type of health care reform
must take into account potential affects on businesses. Because of the prominence of employer-
sponsored health insurance, small firms are currently at a large disadvantage to larger businesses.
High administrative costs and concerns among insurers about adverse selection contribute to
higher premiums for smaller employers, which reduces their willingness to offer health insurance
as part of their compensation package to employees. Consequently, this disadvantage can affect
the ability of small businesses to attract quality workers. This market failure associated with
small firms can also lead to broader economic effects, such as a reduced amount of individual
entrepreneurship, due to the risks (high costs of health insurance coverage) of starting up their
own businesses.
ROLE OF GOVERNMENT
When discussing an ideal approach to solving the issues relating to health care coverage,
the broad role of the government in all markets in the economy must first be defined. Some
individuals, including President Obama, argue that it is an essential mechanism for promoting
economic growth and providing a level of fairness for all American citizens, regardless of socio-
economic status. In contrast, others assert that the government’s main role is to essentially “step
4back”, as has been done in the past, and allow the true workings of free market capitalism to play
out to their maximum effect.
Although proponents of the hands-off concept of government intervention may point to
the benefits of competition and market efficiency, the poor results (both in terms of high costs
and quality of care) prove that this has not worked effectively in America’s health sector. A
long-standing laissez-faire approach in the United States has left a wide and growing gap in
health coverage, with the number of uninsured individuals rising at an ever-increasing rate.
The newly implemented “Obamacare” health coverage laws aim to achieve both the goal
of expanding coverage to more individuals, and to additionally reduce health care costs
throughout the country. In addition to providing health benefits for low-income citizens, the
reform also claims to enhance the country economically. Operating under the premise that
increasing the number of covered individuals will lead to a more efficient and cost effective
health insurance market, as well as improving the quality of the labor force, the Affordable
Health Care Act attempts to solve market distortions by increasing government intervention in
the provision and management of health insurance.
When determining the optimal path for health care coverage, (whether public or private,
or a mixture of both) the key functions of the government must be considered. One of the key
responsibilities of the government is to look after the best interests of its citizens; thus it can be
suggested that it is potentially immoral that the state would not assist citizens in need of health
care, if they could not afford private options. Fundamentally, the provision of free (or
subsidized) health care can be argued to be a “moral obligation”, and essentially an action that
the government is compelled to provide to its poorest citizens, given the amount of power those
individuals have instilled in them from the democratic system.
5POTENTIAL SOLUTIONS
Economically, two main considerations can be analyzed relating to health care coverage.
Primarily, the cost of health care is a major concern to government: if it is too high there are
large budgetary consequences, which negatively impacts the Federal Deficit, and also reallocates
capital away from other areas of the economy. Secondly, if the quality of health care services is
poor, there will be detrimental results for the economy, putting downward pressure on economic
growth, because of losses in productivity and output from workers. These aims are consistent
with the objectives of the Affordable Health Care Act implemented by the government in 2010.
Combating adverse selection in the market should be viewed as a key economic objective
for the government, as it directly contributes to higher premiums, adding to the overall cost of
health care in the United States. The Affordable Health Care Act does attempt to quell this issue
by mandating health insurance to all individuals (apart from those in financial hardship).
Consequently, moving from the current system to one with widespread participation would bring
healthy and sick individuals together in the market, forcing premiums down, and thus decreasing
overall expenditure on health care. The Council of Economic Advisors assess that this
participation would lower the cost of health insurance by around 20 percent, or $1000 per
person, which would reduce the expenditure as a percentage of GDP approximately 0.3 percent
(CEA, 2009). In essence, the government’s proposal looks to solve the problem of adverse
selection by increasing the number of individuals in the market, thereby creating more affordable
insurance costs for all involved. (CEA, 2009).
Improving the functioning of the health insurance market to ensure that providers are not
taking advantage of consumers should also be an ambition for the government. The Affordable
Health Care Act strives to solve the issue of a producer favored market by introducing
6“Affordable Insurance Exchanges”, which aim to provide consumers with added protection from
providers: allowing premiums to be jointly negotiated, increasing information about the design
of the plans, and coordinating risk adjustment to reduce insurer’s risk in the event of adverse
selection within the exchange (CEA, 2009). As such, the improved flow of knowledge regarding
the policies from the insurance providers would allow consumers to make more efficient choices
and lead to decreased costs. Additionally, the standardized application forms and streamlined
insurance purchases may also reduce the growth of administrative costs, which are currently a
major factor of health care expenditure in the U.S (Health Care Cost Institute, 2010).
When determining government-assisted strategies to improve the coverage system it is
crucial that competition continues to be key principle of its overall efficiency. Many other
countries have had success with universal health care plans, although there is a fear that such a
transformation would reduce quality in the market, due to the reduction of competition that
would occur. Fundamentally, the Affordable Insurance Exchange attempts to improve
competitiveness in the private market, even though it is a state run program. In theory, the
exchange will make it easier for individuals and small businesses to compare private qualified
health plans, which would force businesses to either increase the quality of the plans, or reduce
prices (or both). Consequentially, this proposal has the potential to generate greater efficiencies
in the marketing and distribution of coverage, which could lead to lower premiums and higher
coverage rates.
Another large distortion of the current health system is the enormous financial risk many
uninsured individuals face. Because a large percentage of personal bankruptcies in America
result from high medical expenses, any reduction to this number can benefit the economy (U.S.
Courts, 2012). Increasing coverage by providing exchanges, subsidizing low-income
7individuals, and removing pre-existing condition clauses can allow individuals to purchase
policies that administer coverage for extremely high expenses. In essence, the reduction of
financial risk for uninsured individuals would allow benefits to be seen in the wider economy, as
these people would be able to spend more of their income of other consumer goods and services,
increasing the nation’s GDP.
In many countries with a mixture of private and public health care, there are concerns that
public patients receive lower quality care than privately insured individuals. This was a major
objection raised by political opponents in congressional debates concerning the “Obamacare”
plan. Additionally, some studies suggest that many health providers offset financial losses that
occur from treating uninsured individuals through providing lower quality care than for that
given to insured patients (Daysal, 2009). This research provides empirical support for claims
that the optimal policy response should indeed focus on expanding private health insurance
coverage, as failure to do so will lead to inequalities in care for a large number of people.
Additionally, the health benefits of coverage expansions would not be limited to the uninsured.
For contagious diseases such as influenza, quality care for more individuals would prevent the
spread of the illness to others, which would allow them to continue working and being
productive members of the economy. This positive externality shows that an expansive and “all
inclusive” approach to healthcare can benefit the entire economy, and not just the uninsured.
8LABOR MARKET EFFECTS
A large number of the uninsured individuals are currently in the American workforce,
and their health is paramount to overall productivity of the economy, with estimates suggesting
over 48 million people are without coverage in the country (U.S. Census Bureau, 2012). If the
health status of these individuals were to improve, more people would be able to work, and those
who were in the labor force would be more productive. With increased access to insurance and
health care, many of the uninsured presently not healthy enough to maintain employment would
be able to participate in the workforce. Studies have found that the 17 million disabled
individuals in America are three times more likely to be out of the labor force than healthy
people (CEA, 2009). Any reduction in this number would improve the labor force participation
rate. As such, if more individuals were in the workforce, the overall capacity of the economy
would increase, allowing more goods and services to be produced.
The ever-growing group of uninsured older workers in the economy would also directly
benefit from easier access to health care coverage (through subsidized plans, insurance
exchanges, etc.). Enabling pre-Medicare eligible individuals to maintain their health status to
ensure they can continue participating in the labor force is important for their well-being. If
these individuals were able to work for a longer time period, they would expand their years of
earning wages. In turn, savings and retirement income would increase, as well as Federal
income and tax revenue. In addition to these financial benefits for the government, Federal
expenses would also be decreased, because the number of people receiving Social Security
Disability Insurance would be reduced, lowering the government’s social financial strain in the
long term.
9Workplace productivity is another way in which improved access to health insurance and
medical care could positively affect labor supply through decreased absenteeism. Healthier
individuals would be more likely to show up at work, and this would allow firms to produce
more output. This is a large problem for the economy because absenteeism has been proven to
have extremely high long-run indirect costs through losses in productivity. Many of the costliest
conditions (such as depression) can often be efficiently managed with prescription medications,
made more affordable by health insurance (CEA, 2009). Essentially, the expansion in coverage
proposed by the Affordable Health Care Act would lead to important gains in workplace
productivity from improved health care.
Although the new government plan, in theory, will positively affect the provisioning of
health insurance, there are a number of concerns with the act’s policies. Because the Affordable
Health Care Act subsidizes insurance premiums for low-income individuals and families that are
newly insured, the policy may create incentives to stay in a low-income situation, thus reducing
motivation to join the workforce. With the new baseline for Medicaid being raised to 133 percent
of the poverty level, some individuals may find it more cost-effective to stay below this baseline,
and receive complementary care (CEA, 2009). Fundamentally, the government must ensure that
costs of private insurance stay relatively low, to ensure individuals still strive to enter the
workforce, and increase their incomes.
The provision of heath insurance through employers is the most prominent form of
coverage in the U.S.; thus effective reform has the ability to improve the actual efficiency of the
labor market. Presently, due to limitations relating to pre-existing conditions, many workers that
may desire a change in jobs choose not to, out of concern that they would lose access access to
insurance coverage or face less comprehensive policies elsewhere. A more flexible system
10would allow for many of these workers to migrate to jobs where they would be more productive,
thus increasing labor market efficiency in the economy. The Affordable Health Care Act seeks
to provide this flexibility, through both the removal of pre-existing conditions, and the
introduction of the Affordable Insurance Exchange, which also enables a greater deal of choice
for workers.
If nothing is done to improve the functioning of the health insurance system, there could
be severe consequences for the overall efficiency of the labor market. In concrete terms, one
study approximates that individuals would be around 25 percent less likely to change jobs if
were to lose health insurance (CEA, 2009). This figure shows that many people in the economy
would choose to stay in jobs for a longer period of time, when instead they could move to other
areas, where they could operate with greater efficiency.
INTERNATIONAL COMPARISON
An alternative method of determining the most optimal coverage system is to consider
the approaches world leaders in health care have embraced. Despite the fact that there have been
no major rankings since 2000, the World Health Organization’s top five countries from the
health system rankings at that time were all shown to include some function of universal health
insurance provided by the government, along with a steady mixture of private coverage (WHO,
2000).
Although the designation is controversial, the World Health Organization named France
as the world leader in health care in 2000. As such, a measured comparison between America
and France can offer critical answers to the coverage debate. In terms of the key health indicators
(life expectancy, infant mortality rate, mortality rate, and fertility rate), France vastly
11outperforms the U.S., while also having a lower health care expenditure per capita (WHO, 2012).
Additionally, around 95 percent of French citizens are covered by government healthcare
through the Universal Health Coverage Act (CMU), through one of three main schemes (Sandier
et al, 2004). In comparison to the U.S, the remaining 5 percent of citizens are covered by
alternative, private policies.
Control of health care expenditures is a major concern in the U.S., while in France it is a
heavily regulated area, with strong government controls. Each year the French parliament passes
an Act on Social Security Funding based on the reports of the Accounts Commission, and the
National Health Conference (Sandier et al, 2004). The benefits from the report include: a
“ceiling” for health insurance spending for the following year, a report on trends in health care
policy, and the establishment of separate funds for developing pharmaceuticals and the
modernization of hospitals (Sandier et al, 2004). From a financial standpoint, the “hands on”
approach of the French government, (as opposed to the laissez-faire system in America) suggests
that a more efficient allocation of capital can arise from the centralization of decisions relating to
health care expenditures.
Quality of care is a secondary area where the French health system is superior to the
American structure. This may be due in part to the majority of the population being covered by
health insurance, but can also be attributed to the importance of “The Ministry of Health”, the
state agency responsible for over-seeing the overall structure. The government’s central health
division approves base agreements from health insurance companies to ensure that they comply
with the regulatory framework established by parliament (Sandier et al, 2004). In doing so, the
power of coverage providers is reduced, allowing consumers to benefit from fair, cost-effective
plans. Essentially, because the French provide a higher amount of state assistance to citizens,
12universal rules can be applied, which lead to policies that encompass the interests of the
majority.
ECONOMIC EFFECTS
The most reliable estimates currently suggest 48.6 million individuals are without health
care (U.S. Census Bureau, 2011). Bringing a larger number of individuals to participate in the
market will positively affect the country as whole. Since government spending on
uncompensated care (services without reimbursement) is approximately $43 billion (over 0.3
percent of GDP) a reduction to this figure would greatly reduce the Federal burden on health
care. Consequently, with an expansion in coverage to an additional 32 million individuals (as
aimed for by the plan), the government would benefit from large savings that it could allocate to
other areas of the economy. In essence, when combined with the reductions in individuals’ health
insurance costs per year of around $1000, the removal of these distortions by the Affordable
Health Care Act can discard around 0.6 percent of GDP of wasted expenses (CEA, 2009), and
thus increase overall economic efficiency in the U.S. Furthermore, without such a measure
designed to increase participation in the private marketplace, both adverse selection and
uncompensated care costs would increase over time, as the number of uninsured would continue
to rise.
It is also important to consider the overall cost of increasing government intervention in
health care when analyzing the merits of the reform. Recent estimates suggest that the total cost
of providing health insurance coverage to the uninsured, taking into account the decreases in
spending that would occur (uncompensated care, etc.), would be roughly $125 billion per year,
dispersed among individuals, states and the Federal government (CEA, 2009). However, because
13these costs are budgeted to come from increased state revenue and savings in the Federal budget,
there will be no major concerns of increasing insurance coverage, on the deficit.
The ultimate measure of policy efficiency is for the benefits to outweigh the costs; thus
the Affordable Health Care Act must be measured by how well it performs from a financial
standpoint, as well as for quality factors. Putting a monetary value on improvements in citizen’s
health statuses is key information when evaluating overall benefits. Expansions in health
insurance to previously uninsured individuals lead to significant reductions in overall mortality
and infant mortality, from the increased utilization of medical care (Currie and Gruber, 1996).
Due to lives that would be saved, and the increased quality of life that would occur for many
other individuals, a positive value to the economy of around $180 billion a year has been
estimated from the increased coverage (CEA, 2009). In essence, the actual lives saved represent
a financial benefit to the economy, allowing more individuals to work and contribute to firms
producing goods and services for a longer period of time. Additionally from a moral standpoint,
every extra life that is saved as a result of the policy supports the notion that the government is
fulfilling an obligation to its citizens, which is a strong political driver of support.
CONCLUSION
The American health system has the potential to be among the greatest in the world; able
to utilize its large population, physical resource base, and strong financial capital. However,
analyzing the key economic, moral, and political factors regarding health coverage, there is no
doubt that the current structure in the U.S. is in need of reform now more than ever. Although
there will be continual arguments over whether the provision of health insurance is a privilege or
a right, simple comparisons with other OECD countries (such as in table 1) show that the United
14States has a considerable task ahead if it is to reduce expenditures, and raise the quality of care in
the nation.
Expanding coverage for 32 million individuals, as planned under the Affordable Health
Act, will directly affect the growing cost of health care in America. The reduction in
expenditures is a key factor in the government’s new reform. The expansion of coverage will
remove many of the market distortions in the health insurance industry by simply increasing the
participant pool. If the issues of adverse selection are subdued (as planned), all individuals in the
market will be able to benefit from lower premiums, and better choice of plans. The
implementation of subsidized coverage, as well as the Affordable Insurance Exchange, and
removals of limitations on conditions are all positive steps to control cost growth. If these
provisions are implemented effectively in future years, Federal expenditures will decrease,
positively impacting national savings levels, thus reducing the government’s considerably large
financial strain regarding health care.
The cost-benefit analysis that has been completed also points to a positive result of
expansion of coverage to the economy. From the CEA report in 2009, there stands to be a gain of
around $75 billion to $125 billion per year from the increase, taking into affect labor market
gains, decreased expenditures, and reduced individual financial risk. Essentially, from a long-
term standpoint, there are more financial benefits than costs to the economy of expanding
coverage. Consequentially, the non-measurable gains to the low-income individuals that would
benefit from the reform also support the notion that the moral and political responsibilities of the
government are being fulfilled, enabling citizens to truly benefit from an equal sense of
entitlement.
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