1. ACA Evaluative Paper Kiarash P. Rahmanian
UF ID: 9011-8942
A. Statement of ACA provision #1 that addresses the health insurance market
The ACA provision of exchanges will provide healthcare for those that are uninsured and
decrease the national healthcare expenditures for the U.S.
B. Statement of the market failure that this specific provision is addressing
The market failure that this provision is addressing is missing markets. Specifically, there is
no market for multiyear health insurance contracts that would protect individuals throughout
their lives from the risk of becoming sick and having to pay much higher insurance premiums or
lose their coverage entirely. The missing market problem contributes to multiple inefficiencies.
Individuals with high medical spending may be “locked in” to a policy for fear that their
premiums will increase if they change their coverage, particularly in the individual market. The
decision not to seek new coverage may reduce competition in health insurance markets. Labor
markets too suffer negative consequences when workers who want to change jobs stay in their
old jobs for fear of losing insurance.
C. Discussion of the economic theory explaining how ACA provision #1 addresses the
identified market failure (e.g. if the provision is addressing an externality, explain what
the externality is, how the externality results in non-optimal outcomes, and what the
provision does to address or counteract the externality)
The Affordable Care Act extends insurance coverage to the uninsured and makes insurance
markets work more effectively for those who already have coverage. To achieve these goals, it
establishes Health Insurance Exchanges, organized marketplaces in every state that enable
individual consumers without access to affordable employer-sponsored coverage to shop easily
for coverage and receive any tax credits or reduced cost sharing, for which they are eligible. The
Affordable Care Act also establishes Small Business Health Options Program (SHOP) Exchanges,
similar marketplaces in each state for small group coverage. Private insurance companies will
offer plans for sale through the Exchanges beginning in 2014. Beginning in 2017, states can
choose to expand their Exchanges to larger employers as well.
The ACA provision of exchanges will allow for those without insurance to become
insured. Alongside the individual mandate provision of the ACA, this provision provides an
outlet for consumers to purchase qualified coverage. The idea of universal healthcare coverage
will aid in lowering the overall healthcare expenditures of U.S. consumers. The reason for the
growth in healthcare expenditures is because a consumer doesn’t pay the full price for
healthcare and they will use that service more often due to not seeing the full price. This
increases the demand for health care. The declining demand curve will be higher demand at a
lower price. The higher price is for an uninsured individual, whereas the lower price is for an
insured individual. The insured demand curve will have a steeper slope and will shift out from
the “uninsured individual’s” demand curve. This means that the consumer is less responsive to
price changes. Prices increase when you have more demand, hence the increase in healthcare
expenditures. The study by Hadley and Holahan (2003) simulated projected health spending if
Medicaid or private insurance covered all uninsured consumers. This study showed that we
would get a return on our investment if we insured everyone (universal health insurance).

2. ACA Evaluative Paper Kiarash P. Rahmanian
UF ID: 9011-8942
A. Statement of the ACA provision #2 that addresses the health insurance market
The second ACA provision of guaranteed issue, which prohibits insurers from denying
coverage to anyone who wants to buy it, aides in addressing the health insurance market. The
law also prohibits insurers from charging higher premiums for individuals in poor health.
B. Statement of the market failure that this provision is addressing
The market failure addressed here is adverse selection. Adverse selection means that
individuals or families with worse health and thus higher anticipated medical expenditure are
more likely than their healthier equivalents to buy insurance coverage at a given price. This
makes it difficult for insurance firms to foresee costs and establish prices based on those
predicted costs. Also, individuals who desire the most health care coverage tend to be the least
healthy, whereas healthier people tend to need lesser healthcare coverage. Because some
healthy people opt not to have healthcare coverage, the average price of insurance increases
because those now in the insurance pool are less healthy. Rising costs push more people out of
the market for health insurance because they believe the costs of insurance exceeds the
benefits. The end result is that many individuals, some by choice and some due to cost, will not
have health insurance. In addition, even if both parties are informed about health status,
people who have preexisting conditions or other characteristics that make use of health care
more likely (those of older age) may not have, or be able to afford, health insurance. Individuals
could be limited in their facility to pay for health insurance due to low incomes. In this instance,
a lack of individual health care coverage can still create the same negative effects that spillover
in other areas of society.
C. Discussion of the economic theory explaining how ACA provision #2 addresses the
identified market failure
Correcting this market failure requires changing the current practices of both insurance
companies and consumers. This is where the ACA provision called “guaranteed issue,” comes
into play. This provision prohibits insurers from denying coverage to anyone who wants to buy
it. The law also prohibits insurers from charging higher premiums for those with poor health.
For the consumers, if they can afford coverage they are required to have coverage or pay a
penalty, except for specified exemptions. Any incentives that insurers may have to try to attract
healthier consumers will be offset through risk adjustment that transfers payments from
insurers with relatively healthy enrollees to those with sicker enrollees. This framework largely
solves the adverse selection problem.
Countless types of risk-pooling mechanisms have been created to reduce the negative
externalities associated with the private healthcare market. Medicare has addressed the
problem of adverse selection among the elderly, and employer-sponsored health insurance
(ESI) has significantly reduced this problem among the employed population. Some states also
limit variations in premium costs. In addition, ESI provides a pooling mechanism that is
unrelated to health factors and thus addresses both the adverse selection issue and the
problem of being “locked out” of the market for those with poor health. ESI also tends to
reduce administrative costs compared with such costs when individuals purchase coverage on
their own. These pooling and administrative advantages are lessened for businesses with few
employees.

3. ACA Evaluative Paper Kiarash P. Rahmanian
UF ID: 9011-8942
A. Statement of the ACA provision #3 that addresses the health insurance market
The ACA provision of consumer protections will allow for the consumers to make the most
informed decision they possibly can.
B. Statement of the market failure that this provision is addressing
Health insurance markets are defined by their high cost to consumers, who have to search
for the best potential price in order to attain the best deal on their insurance. Without
assistance or support, consumers are expected to gather and evaluate comparative information
on the prices and quality of the vast array of intricate health insurance plans. The excessive cost
of managing that search reduces competition and may result in prices that are higher than
those that are at a competitive level. An effective strategy to reduce these search costs is using
information systems that will assist the consumers to do comparison shopping. For example, in
the life insurance market, as the use of price comparison websites became greater the
reductions in premiums and gains in consumer surplus increased substantially.
C. Discussion of the economic theory explaining how ACA provision #3 addresses the
identified market failure
Consumer protections, in the form of the online choice tool, aid in addressing the market
failure of not providing the consumer with all of the information in order for them to make the
most informed choice in terms of their coverage. The ACA provision established an Internet
website to help consumers identify health coverage options and develop a standard format for
presenting information on coverage options. The online choice tool was developed to put into
place a set of standards for insurers to use in providing information on benefits and coverage.
This tool will enable the consumers to choose coverage based on the characteristics of health
insurance plans that best suit their needs and preferences (for example: premium costs, cost-
sharing, or plan quality ratings). One particular online tool is the HealthCare.gov Web portal. In
2014, Exchanges leveraged these technologies to allow consumers to make informed choices
among the vast array of health insurance plans.
The ability to have access to comparative evaluation of all possible insurance plans allows
the consumer to make the best possible choice in terms of their plan. From an economical
theory standpoint, one of the 5 Assumptions for a perfectly competitive market states that
consumers should have perfect information about a product or service. In the case of health
insurance, they do not. If they think that the product is high quality, the will be a higher
demand and vice versa. In the healthcare insurance industry, the consumers do not have access
to all of the information about the products and services, hence the need for government
regulation (ACA). This is called asymmetric information, where the consumers and insurers
have different information. For instance, a Doctor knows more than the patient (about the
options, efficacy of the options, diagnoses, etc). The patient might not know if they really need
a procedure or test. The way in which this is an example of market imperfection is through
externalities. The reason that Doctors or the healthcare insurance companies do not want
universal healthcare insurance is that their personal interests of overcharging or unnecessary
procedures and exams are lining their pockets. Therefore, because of asymmetry of
information, physicians could theoretically induce demand (principal-agent theory).

4. ACA Evaluative Paper Kiarash P. Rahmanian
UF ID: 9011-8942
A. Statement of the ACA provision #4 that addresses the health insurance market
The ACA provision of employer requirements will be able to create a more competitive
market that does not put entirety of the consumer power with the larger companies in the
industry.
B. Statement of the market failure that this provision is addressing
Most employers in the U.S currently offer health insurance to their employees. The
numbers show that 95% of employers with 50 to 199 employees are provided insurance and
99% of employers with 200 or more employees provide insurance based on the Kaiser Family
Foundation and Health Research and Educational Trust of 2010. ACA levies financial penalties of
$2,000 per full-time worker on the employers with 50 or more workers who do not offer
coverage if their workers obtain premium tax credits for the purchase of coverage in an
Exchange.
C. Discussion of the economic theory explaining how ACA provision #4 addresses the
identified market failure
Fewer than 10,000 firms, (or 0.2% of American businesses) are likely to be affected by the
hefty $2,000 penalty for employer coverage requirements. Small employers (those with fewer
than 50 workers) face no such penalties. On the flip side of the coin, ACA includes a tax credit to
help small businesses (those with fewer than 25 full-time workers and average annual wages
below $50,000) afford health insurance for their workers. Small Business Health Options
Program (SHOP) Exchanges allow small business to join a larger pool of buyers and purchase
coverage that has the identical impartial prices and low administrative cost that larger
employers have historically experienced. Alongside the SHOP exchanges, this tax credit system
will even the playing field for small and large employers in terms of health benefits.
The ability to take away the market power from the larger employers allows the consumers
from the smaller employers to gain fair and equal access to healthcare insurance for their
employees. From an economical theory standpoint, the market price is lower than what it
would be under perfect competition. If there is more competition (in the competitive fringe)
the quantity will be lowered, causing the pot to be “shared” more. A larger competitive fringe
would cause the price set by the dominant firm to fall as the supply curve shifts to the right. If
more fringe companies are willing to take any price, the Supply curve (sloped line upward at
Point B) would shift to the right (or out). In a perfectly competitive market, the profit is
minimal. But in a marketplace with a dominant firm, they have market power and they set the
price, causing the profits to be higher. Having market power also allows insurers to practice
price discrimination. Price discrimination is when different customers are charged different
prices for the same good. Insurers could do this with the employees from the smaller
companies who are not insured.

5. ACA Evaluative Paper Kiarash P. Rahmanian
UF ID: 9011-8942
A. Statement of the ACA provision #5 that addresses the health insurance market
The ACA provision of Medicaid expansion will afford Medicaid eligibility to all individuals in
families with incomes at or below 133% of the Federal poverty level.
B. Statement of the market failure that this provision is addressing
Expanding Medicaid eligibility provides a dire coverage option for the citizens that are the
most economically susceptible. ACA also distributes assets to states to counterbalance their
auxiliary costs for recently eligible individuals (100% of the costs for the initial 3 years, phasing
to 90% permanently thereafter). ACA has also proposed additional resources that will help
states design and apply restructured enrollment systems in order to make obtaining health
insurance a smooth process.
C. Discussion of the economic theory explaining how ACA provision #5 addresses the
identified market failure
The ACA provision of Medicaid expansion will allow for all non-Medicare eligible individuals
under age 65 (children, pregnant women, parents, and adults without dependent children) with
incomes up to 133% of the Federal poverty level based on modified adjusted gross income (as
under current law undocumented immigrants are not eligible for Medicaid) to become insured.
All recently eligible adults are guaranteed a standard benefit package that meets the
fundamental health benefits available through the Exchanges. The Supreme Court ruling on the
constitutionality of the ACA upheld the expansion of Medicaid, but restricted the ability of HHS
to require it, thereby leaving the decision up to individual states. To finance the new health
insurance coverage for the recently eligible, individual states will receive 100% federal funding
for 2014 through 2016, 95% in 2017, 94% in 2018, 93% in 2019, and 90% for 2020 and
subsequent years.
This provision provides an outlet for uninsured consumers to gain healthcare insurance
coverage. As with the exchanges provision, the idea of universal healthcare coverage will aid in
lowering the overall healthcare expenditures of U.S. consumers. The reason for the growth in
healthcare expenditures is because a consumer doesn’t pay the full price for healthcare and
they will use that service more often due to not seeing the full price. This increases the demand
for health care. The declining demand curve will be higher demand at a lower price. The higher
price is for an uninsured individual, whereas the lower price is for an insured individual. The
insured demand curve will have a steeper slope and will shift out from the “uninsured
individual’s” demand curve. This means that the consumer is less responsive to price changes.
Prices increase when you have more demand, hence the increase in healthcare expenditures.
The study by Hadley and Holahan (2003) simulated projected health spending if Medicaid or
private insurance covered all uninsured consumers. This study showed that we would get a
return on our investment if we insured everyone (universal health insurance).