What Is the Affordable Care Act (ACA)?

The Affordable Care Act (ACA) is the comprehensive healthcare reform signed into law by President Barack Obama in March 2010. Formally known as the Patient Protection and Affordable Care Act, and often just called Obamacare, the law includes a list of healthcare policies intended to extend health insurance coverage to millions of uninsured Americans.

The Act expanded Medicaid eligibility, created health insurance exchanges, mandated that Americans purchase or otherwise obtain health insurance, and prohibited insurance companies from denying coverage (or charging more) due to pre-existing conditions. It also allows children to remain on their parents' insurance plan until age 26.

As part of the American Rescue Plan of 2021, subsidies for coverage purchased through healthcare.gov have been increased, and eligibility for subsidies has been extended to higher income levels.

Key Takeaways

  • The Affordable Care Act (ACA), also known as Obamacare, was signed into law in March 2010.
  • It was designed to extend health coverage to millions of uninsured Americans.
  • The Act expanded Medicaid eligibility, created a Health Insurance Marketplace, prevented insurance companies from denying coverage due to pre-existing conditions, and required plans to cover a list of essential health benefits.
  • Lower-income families qualify for subsidies for coverage purchased through the Marketplace.

Understanding the Affordable Care Act (ACA)

The ACA was designed to reduce the cost of health insurance coverage for people who qualify. The law includes premium tax credits and cost-sharing reductions to help lower expenses for lower-income individuals and families.

Premium tax credits lower your health insurance bill each month. Cost-sharing reductions, meanwhile, reduce your out-of-pocket costs for deductibles, copays, and coinsurance, as well as lowering your out-of-pocket maximum: the total amount you pay in a year for covered health expenses.

President Biden signed an executive order on Jan. 28, 2021, that opened an ACA Special Enrollment Period from Feb. 15, 2021, to May 15, 2021, to "give Americans that need health care coverage during this global pandemic the opportunity to sign up."

All ACA-compliant health insurance plans—including every plan that's sold on the Health Insurance Marketplace—must cover specific "essential health benefits" including:

  • Ambulatory patient services
  • Breastfeeding
  • Emergency services
  • Family planning
  • Hospitalization
  • Laboratory services
  • Mental health and substance use disorder services
  • Pregnancy, maternity, and newborn care
  • Prescription medications
  • Preventive and wellness services and chronic disease management
  • Pediatric services
  • Rehabilitative and habilitative service

In addition, the ACA requires most insurance plans, including those sold on the Marketplace, to cover at no cost to policyholders a list of preventive services. These include checkups, patient counseling, immunizations, and numerous health screenings. It also allowed states that opted in to extend Medicaid coverage to a wider range of people. As of June 2021, 37 states and the District of Columbia had exercised that option.

Every year, there is an open enrollment period on the Health Insurance Marketplace during which people can buy or switch insurance plans. If you miss this time, you cannot enroll until the following year unless you qualify for a special enrollment period because your circumstances change—for example, you marry, divorce, become a parent, or lose a job that provided health insurance coverage.

Special Considerations

A critical part of the original ACA was the individual mandate, a provision requiring all Americans to have healthcare coverage—either from an employer or through the ACA or another source—or face tax penalties. The mandate was eliminated in 2017.

This mandate served the double purpose of extending healthcare to uninsured Americans and ensuring that there was a sufficiently broad pool of insured individuals to support health insurance payouts.

Combined with the mandates that insurers issue coverage covering a wide range of care and conditions, including pre-existing conditions, these parts of the law were designed to overcome problems described by the economic theories of asymmetric information and the principal-agent problem.

In short, the mandates for guaranteed issues and pre-existing conditions would create a massive industry-wide adverse selection and moral hazard problems. Since they were guaranteed coverage, only unhealthy people would have an economic incentive to buy most kinds of health coverage, while healthy people would have an incentive to put off purchasing coverage until they needed it, creating a wide-spread adverse selection.

In the meantime, healthy people would even have an incentive to engage in more behaviors that put their health at risk, secure in the knowledge that they would be guaranteed coverage if their behavior produced poor health outcomes. That's the problem of moral hazard. Requiring that all individuals purchase and maintain health insurance coverage regardless of whether they needed or wanted it, was intended to overcome both the adverse selection and moral hazard problems that the other provisions of the law would predictably create.

Criticism of the Affordable Care Act (ACA)

This mandate represented an unprecedented expansion of federal power over the healthcare industry and the economy in general in that it required all individuals to purchase a service (health insurance) on the market whether they wanted to or not.

This aspect of the law was a major focus of debate and was challenged in the U.S. Supreme Court in 2012 by the National Federation of Independent Business. The Court ruled in favor of the individual mandate as a constitutional exercise of the taxing authority of the Congress, characterizing the penalties levied against the uninsured as a tax.

Recent History of the Affordable Care Act (ACA)

After President Obama left office, the ACA weathered opposition and a number of significant changes.

Trump administration

On Jan. 20, 2017, in his first executive order after taking office, former President Donald Trump signaled his intention to defund the ACA, saying executive agency heads should "delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State." The intention of this order signaled the first phase of Republican efforts to repeal and replace the ACA.

Attempts by the government in 2017 to repeal the law altogether were not successful. However, the government substantially scaled back its outreach program to help Americans sign up for the ACA and cut the enrollment period in half.

Changes have been made to the law that addressed some of the objections raised by opponents, while still keeping the Marketplace open for users. For example, as part of the Tax Cuts and Jobs Act, Congress in December 2017 removed the penalty for not having health insurance. Starting with 2019 taxes, the individual mandate penalty was reduced to zero dollars, essentially removing the requirement that many Republicans had opposed.

By 2018, the number of Americans covered under the ACA had dropped from 17.4 million in 2015 to 13.8 million, according to a report from healthcare research organization KFF. By 2021 there were 11.3 million people with plans through the ACA, but 14.8 million people newly enrolled in Medicaid through the ACA expansion.

Support for the ACA returned to a record high of 55% at the end of 2020, according to polling from Gallup.

In March 2019, House Democrats unveiled legislation to shore up the Act and expand coverage, while the Trump administration revealed it would seek to repeal the entire ACA. The Justice Department in a letter to a federal appeals court said it agreed with a federal judge in Texas, who declared the healthcare law unconstitutional, and added that it will support the judgment on appeal. The case was heard by the Supreme Court in November 2020, with a coalition of 21 attorneys general defending the ACA.

Biden administration

The 2020 presidential election also represented a massive victory for the ACA. President Joe Biden, who helped Obama pass the law, is widely expected to make efforts to strengthen the ACA during his term and veto further legislative attempts to overturn it.

In addition to setting up a new special enrollment period, the executive order Biden signed on Jan. 28, 2021, also focused on "rules and other policies that limit American's access to health care," ordering federal agencies to examine five areas and decide whether action is needed there:

  • Protections for people with pre-existing conditions, including COVID-19 complications
  • Work requirements and other limitations to access to Medicaid and the ACA
  • Policies undermining health insurance markets, including the Health Insurance Marketplace
  • Policies increasing the difficulty of enrolling in Medicaid and the ACA
  • Policies reducing affordability or financial assistance, for recipients or dependents