ACA and the Effects of Moral Hazards in Industry

While the Affordable Care Act (ACA) enabled tens of thousands of uninsured Americans with lower incomes to get their healthcare needs covered at the lowest possible premiums, it undermined the possibility of increase in moral hazards within the healthcare insurance industry. Mandatory health insurance coverage, community ratings, pricing restrictions, enhanced minimum standards and limited incentives for encouraging health insurance purchases are to name a few. To know how Affordable Care Act provisions can affect moral hazards, it is vital for you to understand what exactly the term “moral hazard” means as well as specific manner in which the health insurance market works.

What is a Moral Hazard?

The term “moral hazard” refers to a situation where in one party has the privilege to use resources that are more than normally used since another party is going to bear the costs. It means one party is taking more risks over other party; the resultant is what is known as moral hazard. It has nothing to do with morals but its effects on market can be felt in supply restrictions, increased prices and encouraged overconsumption. Moral hazards exist between insurers and their customers and could be very much similar to the ones experienced among lenders and borrowers or employers and employees.

Health Insurance and Moral Hazards

Long before Obamacare or ACA came into effect way back i n 2010, there were moral hazards in the health insurance industry. For example, tax credits were provided to employers for buying group healthcare insurance policies. But the Affordable Care Act has changed offered more concessions for making health insurance coverage more affordable. Accordingly, the following features became effective.

• There is an individual mandate for uninsured Americans to buy health insurance or else pay fine.
• Affordable healthcare insurance can be accessed easily on government and private marketplaces.
• Insurers cannot deny health insurance coverage even if buyer has pre-existing medical condition.

However, the individual mandate requirement has now been repealed following changes to Tax Cuts and Jobs Act, 2017. The new law, starting 2019, eliminates penalty clause for not getting personal or family health insured. A restriction in costs, mandatory healthcare coverage and reduction in health insurance benefits has made the ACA almost redundant. This has invariably lead to hike in premiums and now things appear to be more consistent with the economic theory of moral hazards.