Economics of the Affordable Care Act

Any effort to replace the Affordable Care Act will be confronted by the same structural imbalances in the health care economy that the legislation’s authors faced.

The Affordable Care Act (ACA), which President-elect Donald Trump and the Republican-controlled Congress have vowed to repeal, was crafted to overcome two basic problems in the provision of health care in the United States. First, the costs are incredibly skewed, with just 10 percent of patients accounting for almost two thirds of the nation’s healthcare spending. The other problem is asymmetric information: Patients have far more knowledge about the state of their own health than insurers do. This means that the people with the largest costs are the ones most likely to sign up for insurance. These two problems make it impossible to get to universal coverage under a purely market-based system.

The problem with the skewing of health care costs is that while most people’s health spending is relatively limited, it remains very expensive to provide care for the costliest 10 percent. The Centers for Medicare and Medicaid Services projects that per capita spending on health care in the US will average $10,800 in 2017. But the cost for the most expensive 10 percent of patients will average $54,000 per person, compared to an average of just $6,000 for everyone else. The cost for the healthiest 50 percent of patients averages under $700 per person.

Covering the least costly 90 percent of patients is manageable, but the cost of covering the least healthy 10 percent is exorbitant. Very few people could afford to pay $54,000 a year for an individual insurance policy. Furthermore, if insurers were to set their premiums in accordance with overall averages, they could anticipate a skewed patient pool. The more healthy half of the population, with average costs of less than $700 a year, would either limit their insurance to catastrophic plans that only cover very expensive medical care, or go without insurance altogether.

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