Thoughts on the Distributional Effects of the Affordable Care Act

by Reihan Salam

Back in 2010, the Tax Foundation released an estimate of the distributional effects of the Affordable Care Act in fiscal year 2016. The numbers are dated, as the post-cliff ATRA tax code and new estimates of the cost of subsidies, etc., will have moved things around. But it is a good guide to the rough magnitude of the impact of the ACA on income redistribution. The taxes embedded in the ACA, e.g., the unearned income Medicare contribution tax, are fairly narrowly-targeted to high-earners, and so redistribution away from the highest-earners is substantial. And the average value of subsidies for households at the 40th household income percentile and below is quite large. If the goal of the ACA were simply to reorient resources from the rich to the poor (and not to spend the money wisely, etc.), it is likely to be a success. Yet the ACA isn’t actually transferring cash to low-earners but rather an in-kind benefit. The providers of this in-kind benefit (insurers, medical providers) will capture a good amount of the value of this transfer of resources. Coalitions in favor of expanding in-kind benefits profit from having focused constituencies working on their behalf, while coalitions in favor of, for example, increasing wage subsidies or unconditional cash transfers can’t say the same. Increasing the purchasing power of low-income households will benefit the members of these households and the various businesses that cater to them, but this is a fairly diffuse and diverse group. One thing that can be said for increasing wage subsidies, however, is that like the cause of subsidizing medical care, it has a moralistic appeal. 

I tend to think that we’d be better off if more redistribution took place via conditional transfers like wage subsidies rather than in-kind transfers, like subsidies for medical coverage. In an ideal world, increasing the purchasing power of low-income households via wage subsidies would make low-income individuals more attractive customers for innovative, low-cost medical providers. But betting on this outcome entails betting that low-income individuals will make good decisions in guarding themselves against the risk of catastrophic expenditures. So the push for coverage expansion is motivated not just by humanitarian gut instinct or by the narrow interests of medical providers, but also by an implicit conviction that many people (if not most) are terrible at planning ahead, or that many (if not most) would prefer not to do so. Some argue that the chief virtue of Canada’s single-payer system and others like it is that they remove the maddening uncertainty and switching costs that arise in a more fragmented payment system like our own. 

Critics of the Affordable Care Act need to reckon with all of these issues: because the ACA is very much about redistribution, whether or not its advocates acknowledge that this is the case, is there another model of redistribution that we prefer? Are the frustrations that arise under a fragmnted system actually worth it? The ACA will still leave us with a fragmented system, but is there a different fragmented health system that will yield much better results that centralized systems? I think that the answer to the latter question is probably yes, but ACA opponents need to do a better job of explaining how and why. One of most convincing arguments I’ve heard against a more centralized U.S. health system is that American political culture is allergic to rationing, and so only by having private sector intermediaries governing decisions about how health dollars are deployed can we have any hope of imposing meaningful cost control. When a private insurer tells you that you can get an MRI at a deep discount if you do it at 4 AM, you might be grateful for the opportunity to take advantage of a deal. But if Medicare told you to do the same, you might be angry at Congress. Disintermediation thus has a pretty significant downside.