Why the Affordable Care Act, as Construed by the U.S. Supreme Court, Will Fail

Abstract

Proponents of the Patient Protection and Affordable Care Act of 2010 (ACA) set forth two primary goals: (1) to constrain health care costs and (2) to expand health insurance coverage. In its June 28, 2012 decision upholding the constitutionality of the ACA, the U.S. Supreme Court effectively re-wrote the statute so that it will attain neither of those objectives. By placing constitutional limits on the penalties (which it construed as “taxes”) for failure to carry health insurance, the Court exacerbated the adverse selection problem created by the ACA’s imposition of “guaranteed issue” and “community rating” restrictions on health insurers. That adverse selection problem, which now cannot be corrected by significantly increasing the penalties for failure to carry insurance, will substantially increase health insurance premiums. Those higher premiums will not be reduced by ACA provisions aimed at decreasing the cost of medical services, for the cost-reducing provisions in the Act are anemic, and the Act ignores altogether the primary driver of medical inflation: the absence of price competition among service providers, a problem created by a tax code that encourages overly generous third-party insurance arrangements. Finally, the Act, as modified by the Supreme Court, is unlikely to enhance insurance coverage by nearly as much as its proponents claimed and expected. The ACA’s provision of large subsidies for employees who lack access to employer-provided health insurance encourages employers to drop insurance coverage, but many employees who lose employer-provided coverage will, because of the ACA’s deficient “no insurance” penalties, lack adequate incentives to purchase their own insurance. In addition, the Supreme Court’s reduction of the sanctions on states that decline to expand their Medicaid rolls substantially disabled the main driver of coverage expansion. In sum, the ACA, as modified by the Supreme Court’s June 28, 2012 ruling, will increase health insurance premiums, will fail to reduce underlying medical costs, and will enhance insurance coverage by far less than the Act’s proponents promised.

Keywords: ACA, affordable care act, affordable care, patient protection, health insurance, supreme court, guaranteed issue, community rating, adverse selection, Medicaid

JEL Classification: H20, H53, H72, H77, I11, I18, I38, K34, and L51