Why Did the Affordable Care Act Make Health Insurance More Expensive?

The Affordable Care Act (ACA) was designed to provide Americans with more comprehensive health coverage, but it has been met with criticism for its impact on costs. Critics argue that the new law has led to higher premiums because it imposes stricter regulations, including the mandate to cover pre-existing conditions. However, the reality is more complex and rooted in the dynamics of the insurance industry and the way health insurance works.

Industrial Scale Greed and the Insurance Industry

The for-profit nature of the insurance industry played a significant role in the perceived increase in health insurance costs. Before the ACA, insurance companies often avoided high-risk individuals with pre-existing conditions, pushing them towards more expensive options or even denying coverage. When the government mandated coverage, they did not anticipate that their profits would be squeezed by the need to cover these high-risk individuals.

Insurance companies now must spend at least 80% of premium revenue on healthcare and cover a standardized set of basic services. This new requirement made insurance more expensive for consumers, as it had to cater to a wider range of healthcare needs. Previously, low-cost insurance plans offered limited coverage, which was often not sufficient for serious illnesses or injuries. The ACA effectively made selling this kind of insurance illegal.

The Economics of Insurance Pools

The ACA's regulation of insurance pools has a significant impact on cost. The fundamental principle of health insurance is based on averages. Let's break down how this works with a simplified example. Imagine a group of 100 people with varying levels of healthcare expenses:

10 people never visit a doctor (cost: $0) 10 people spend $200 annually on check-ups (cost: $200) 20 people have $500 yearly in expenses (cost: $500) 20 people have $1000 yearly in expenses (cost: $1000) 19 people have $5000 yearly in expenses (cost: $5000) 1 person has $1 million in expenses (cost: $1,000,000)

The average cost per person in this group is calculated as follows:

Total cost: 10($0) 10($200) 20($500) 20($1000) 19($5000) 1($1,000,000) $1,127,000

100 people × $11,270 $1,127,000 (average cost per person: $11,270)

This demonstrates that in a pool, a small number of individuals can drive up the average cost significantly. The ACA's requirement to cover everyone, including those with pre-existing conditions, means that the average cost per person increases, leading to higher premiums for everyone.

Strategies Used by Pre-ACA Insurers

Before the ACA, insurance companies employed various tactics to manage their risk and keep costs low:

Excluding High-Risk Individuals: Insurance companies would charge more for or refuse to cover those with pre-existing conditions, such as cancer, diabetes, or heart disease. Limited Coverage: Some policies had very low coverage limits. For example, if an insurance company capped coverage at $500,000 per year per person, the average amount paid would be substantially lower than the actual cost of services. Mini-Med Plans: Many employers offered policies with minimal coverage, often covering only a limited number of primary care visits. These plans, known as "mini-meds," were cheaper but did not provide comprehensive coverage. Exclusions and Limitations: Prior to the ACA, many policies excluded various services such as mental health care, birth control, and preventive check-ups. This meant that coverage was often incomplete and did not fully cover medical needs.

The ACA addressed these issues by requiring a standardized set of benefits, making it illegal to offer insurance with limited coverage or exclusions. This regulatory change led to higher premiums for consumers, as insurers had to provide more comprehensive coverage.

Conclusion

The Affordable Care Act's impact on health insurance costs is a complex issue involving changing regulations, increased coverage requirements, and the dynamics of insurance pools. While the law may have led to higher premiums, it has also significantly improved access to healthcare for millions of Americans. The key is to understand the economic principles at play and the evolution of how health insurance is structured in the United States.