The Patient Protection and Affordable Care Act was signed into law by President Barack Obama in 2010. Commonly known as the Affordable Care Act (ACA) or Obamacare, the law expanded Medicaid, created health insurance exchanges, and included health-related provisions so millions of uninsured Americans could get health insurance.
Coverage was designed to be affordable under the ACA. The Act provided those with lower incomes with premium tax credits and cost-sharing reductions. The ACA inflated existing moral hazards in the health insurance industry by mandating coverage and community ratings, restricting prices, establishing minimum standards requirements, and creating a limited incentive to compel purchases.
Key Takeaways
- A moral hazard exists where one party in a contract assumes the risks associated with the other party without suffering any consequences.
- Moral hazards can be found in employee/employer relationships, in contracts between lenders and borrowers, and in the insurance industry between insurers and their clients.
- Before Obamacare, moral hazard was encouraged in health insurance with tax incentives that encouraged employer-based health coverage, placing consumers further away from medical costs.
- The ACA tried to cut back on the moral hazard of healthy people skipping health care coverage by imposing an individual mandate.
What Is a Moral Hazard?
The term moral hazard refers to a situation where one party has an incentive to use more resources than they otherwise would have because another party is bearing the costs. One party to a contract ultimately assumes risk to the other party without any consequences. The aggregate effect of moral hazard in any market is to restrict supply, raise prices, and encourage overconsumption.
Moral hazard has played a significant role in the health insurance segment of the economy. Moral hazards existed in the U.S. insurance markets before Obamacare but the Act’s flaws exacerbate rather than alleviate those problems. There are no normative, morality-based elements to the economic sense of moral hazard.
Moral Hazard and Health Insurance
Many argue that health insurance itself is a moral hazard because it reduces the risks of pursuing an unhealthy lifestyle or other risky behavior. But this is only true if the costs to the customer, including insurance premiums and deductibles, are the same for everyone.
Moral hazard is largely removed when prices are allowed to reflect real information. Decisions to smoke cigarettes or go skydiving look different when they cause premiums to increase from $50 to $500 per month.
Insurance underwriting is crucial for this reason but many regulations that are designed to promote fairness end up clouding this process. Insurance companies raise all rates to compensate.
Moral hazard in health insurance in the United States was encouraged before Obamacare. Tax incentives have encouraged employer-based health coverage, placing consumers further away from medical costs. As economist Milton Friedman once stated, “Third-party payment has required the bureaucratization of medical care…the patient…has little incentive to be concerned about the cost since it’s somebody else’s money.”
Moral Hazard and the Affordable Care Act
The ACA is 2,500 pages long so it can be very difficult to grasp its full impact. But here’s a look at some of the basic provisions outlined in the law:
- Insurers can no longer deny coverage to those with pre-existing conditions.
- New government health insurance exchanges determine the type and cost of plans available to consumers.
- Large employers are required to offer employee health coverage.
- All plans must cover the 10 essential benefits of health insurance.
- Annual and lifetime limits on employer plans are banned.
- Plans are only considered affordable if the cost is less than 9.5% of family income.
The act also carried with it an individual mandate, a requirement that all uninsured Americans had to purchase a health insurance policy or pay a fine. But there were hardship exemptions in place to protect those who couldn’t afford coverage.
This individual mandate was signed in 2010 and it went into effect in 2014. The idea behind it was that people who were fairly healthy would decline coverage so they could save the added expense of a health insurance premium. Insurance companies would raise rates to compensate for lost revenue, putting more financial stress on those who did have coverage. Anyone who didn’t have coverage would pay the penalty by including it on their federal income tax returns.
2017 TCJA Changes
The individual mandate was ultimately repealed when the Tax Cuts and Jobs Act (TCJA) was passed in 2017. This law eliminated the fine imposed on people without health care coverage beginning in 2019. But there are still several states that require residents to have coverage despite the TCJA’s terms.
The individual mandate was repealed after the Tax Cuts and Jobs Act was signed into law but several states require residents to carry health insurance coverage or face a fine.
Restricting costs, mandating employer coverage, and requiring minimum benefits further drive a wedge between the consumer and the real cost of health care. Premiums have predictably spiked since the passage of the Act, consistent with economic theory about moral hazard.
Is the ACA Still in Effect?
The Affordable Care Act is still in effect although the Tax Cuts and Jobs Act altered some of its provisions. More than 40 million Americans had obtained health insurance coverage under the ACA by early 2023. The figure set a record.
Are the ACA Premium Tax Credits Still Available Since the Passage of the TCJA?
Yes, but they’re not and never have been available to everyone. Only American households with incomes between 100% and 400% of the federal poverty level can qualify for the credits.
What Other Industries Are Vulnerable to Moral Hazards?
Moral hazards can be found in employee-employer relationships, in the financial industry with contacts between lenders and borrowers, as well as in the insurance industry between insurers and their clients.
The Bottom Line
Moral hazard results when one party uses more resources than they otherwise would have because someone else is effectively paying for them. Moral hazard was effectively discouraged in health insurance when Obamacare was enacted in 2010 but the Tax Cuts and Jobs Act (TCJA) made changes to at least one key provision in 2017.