The Affordable Care Act or Obamacare

Signed into law by President Barack Obama in 2010, the Patient Protection and Affordable Care Act—generally known as the Affordable Care Act or ACA—is responsible for the most sweeping reforms of the United States’ healthcare system since the 1965 passage of Medicare and Medicaid. This article will explain how the ACA has changed health insurance in the United States.

Some of the ACA's affordability provisions have been temporarily enhanced by the American Rescue Plan (ARP) Act. This law was designed to address the COVID pandemic and was signed into law by President Joe Biden in 2021. The Inflation Reduction Act is expected to extend some of the ARP's subsidy enhancements through 2025. Where applicable, these enhancements are noted below.

Background

Hotly contested along party lines, Republicans opposed the Affordable Care Act, derisively using the term Obamacare to describe the Act. But it should be noted that although no Republicans voted for the final bill, the process of creating the ACA was very much bipartisan.

By 2012, President Obama had embraced the term Obamacare, and it is now widely used by both supporters and opponents of the law. But controversy about the ACA continued after its passage, with numerous court challenges to the law, including a significant case that unsuccessfully attempted to overturn the ACA more than a decade after the law was enacted.

What Are the Reforms?

The ACA implemented a wide range of reforms. Some are more behind-the-scenes, including payment reforms, efficiency in the Medicare system, and a focus on value-based care.

But many of the reforms have significantly changed the landscape of health insurance in America, including coverage, access, and affordability. The bulk of these consumer-facing reforms have applied to the individual/family market, and to some extent, the small group market.

There have also been changes in the large-group market and for Medicare and Medicaid. Here's a summary of some of the most important changes (note that grandmothered and grandfathered plans are exempt from many—but not all—of the ACA's requirements):

Guaranteed-Issue Coverage in the Individual Market
All individual major medical health plans purchased since 2014 have been guaranteed issue. The ACA prevents insurers from refusing to cover people with a pre-existing condition, or from charging them higher premiums because of a pre-existing condition.

This is true both on and off the exchange and represents a significant change from how the individual market functioned prior to 2014 in nearly every state. (Note that while short-term health plans are sometimes referred to as major medical plans, they are not regulated by the ACA and they still use medical underwriting.)

Health Insurance Exchanges
The ACA created health insurance exchanges, or marketplaces, where individuals and families—and in some states, small businesses—may purchase guaranteed issue qualified health insurance plans.

Note that there is just one official exchange in each state. In most states, it's HealthCare.gov, but DC and 17 states have fully state-run exchanges and use their own websites for enrollment.

Individual major medical plans can also be purchased directly from the insurance companies (with the exception of DC, where all plans are sold via the exchange), and the coverage is still guaranteed issue.

But financial assistance is not available outside the exchange, so this is generally only a good idea for people who know that they aren't eligible for any sort of financial assistance. The American Rescue Plan makes many previously ineligible people eligible for subsidies for the first time, but only if they enroll in a plan through the exchange.

Limited Enrollment Windows
Regardless of whether individual major medical coverage is purchased through the exchange or directly from an insurer, it's only available during open enrollment or a special enrollment period.

Prior to the ACA, individual major medical coverage could be purchased at any time, but applicants were subject to medical underwriting in nearly every state.

Premium Subsidies
The ACA provides low and middle-income purchasers with subsidies (premium tax credits) to make buying health insurance more affordable.

Under ACA rules, premium subsidies are only available to enrollees whose household income does not exceed 400% of the poverty level. But Section 9661 of the American Rescue Plan, enacted in March 2021, temporarily removes this income limit in 2021 and 2022. And the Inflation Reduction Act, under consideration by Congress in 2022, would extend that provision through 2025.

So for the time being, there is no upper cap on income for subsidy eligibility. Instead, people with income at or above 400% of the poverty level are simply expected to pay no more than 8.5% of their income for the benchmark plan's premium. If it would cost more than that, a subsidy is available.

The American Rescue Plan has also increased the size of premium subsidies for people with incomes below 400% of the poverty level, for 2021 and 2022. This would also be extended through 2025 under the Inflation Reduction Act.

(For perspective, for 2022 coverage, 400% of the poverty level is $51,520 for a single individual and $106,000 for a family of four; prior to the American Rescue Plan, these would have been the income caps for subsidy eligibility in 2022, but those limits have been temporarily removed.)

Cost-Sharing Reductions
There are also subsidies to reduce out-of-pocket costs for eligible enrollees who select silver plans in the exchange (income cannot exceed 250% of the poverty level or $66,250 for a family of four in 2022). These subsidies help to improve access to health care by reducing the amount of money that enrollees have to pay when they receive medical care.

Individual Mandate
For tax years 2014 through 2018, the ACA also imposed a tax penalty on those who remained uninsured; the penalty took effect in 2014, and gradually ramped up to its maximum level by 2016.

Although there is still a law requiring most Americans to maintain minimum essential health insurance coverage, the penalty for non-compliance was reduced to $0 as of January 2019, under the terms of the Tax Cuts and Jobs Act that was enacted in late 2017.

People are no longer subject to penalties for being uninsured unless they live in one of the states where state-based individual mandates (and penalties) have been implemented.

Essential Health Benefits

The ACA requires health insurance plans in the individual and small group markets to cover ten essential health benefits.

One of the essential health benefit categories is preventive care, and a wide range of preventive care services are required to be covered with no cost-sharing. Although large group plans are not required to cover the full list of essential health benefits, non-grandfathered large group plans are required to cover preventive care with no cost-sharing.

(Large group means 51+ employees in most states, although there are four states where small group plans cover businesses with up to 100 employees, and large group plans are for groups with 101 or more employees.)

Elimination of Lifetime and Annual Limits
The ACA eliminated annual and lifetime dollar caps on how much an insurance company will pay for an insured’s covered health care (essential health benefits), and limits out-of-pocket maximum costs. 

Large group health plans are not required to cover all of the essential health benefits (most do, however). But for any essential health benefits that they do cover, they cannot impose any dollar limits on how much they'll pay for those services.

Actuarial Value Requirements
In the individual and small group markets, all plans issued since 2014 (with the exception of catastrophic plans in the individual market) have to fit into one of four "metal" levels (bronze, silver, gold, and platinum) that are determined based on actuarial value.

Employer Mandate
The ACA requires large employers—those with 50 or more full-time equivalent employees—to offer affordable health insurance (that provides minimum value) to all full-time (30+ hours per week) employees, or risk a penalty under the employer shared responsibility provision.

Employers must ensure that the coverage is considered affordable for the employee, but there's no affordability test for the cost of covering family members under the plan. Because of how this works and how subsidy availability is determined in the exchanges, some people are unable to obtain affordable coverage due to what's referred to as the "family glitch."

However, the IRS has proposed a solution to the family glitch that's expected to be in place as of 2023. Employers will continue to only be required to ensure that coverage is affordable for the employee, but some families will find that they're newly eligible for subsidies in the exchange under the proposed family glitch fix.

Expansion of Medicaid and Transition to MAGI-Based Eligibility
Medicaid has historically covered low-income, low-asset Americans who were also either pregnant, children, parents of minor children, disabled, or elderly.

The ACA called for an expansion of Medicaid to cover adults age 19-64 (including those who do not have children and are not pregnant or disabled) with income as high as 138% of the poverty level (133% plus a 5% income disregard). The law also transitioned some Medicaid populations to an eligibility system that only considers income, without taking assets into consideration.

But a Supreme Court ruling in 2012 made Medicaid expansion optional for each state. There are still 12 states (as of 2022) that have refused to expand Medicaid, despite the fact that the federal government would pay 90% of the cost. As a result, there are 2.2 million Americans caught in the Medicaid coverage gap—their incomes are too low for premium subsidies, but they're also ineligible for Medicaid (the coverage gap exists in 11 of the 12 states that have not expanded Medicaid; Wisconsin does not have a coverage gap, as it has essentially implemented a partial Medicaid expansion).

Improvements to Medicare
The ACA also gradually closed the Medicare Part D donut hole, and added new preventive care benefits to Medicare.

Some Parts of the Affordable Care Act Have Been Delayed or Eliminated

Some parts of the ACA have been altered, delayed, or will never be implemented.

As noted above, the Supreme Court disallowed a provision that would have withdrawn federal Medicaid funding to states that didn’t offer Medicaid to more people. Most states have expanded Medicaid anyway, but some continue to resist expansion, leaving 2.2 million people in 11 states with essentially no realistic access to coverage.

Additionally, Congress repealed the long-term care provision of the ACA, known as the CLASS Act, in January 2013 after the Department of Health and Human Services determined it was unworkable.

Numerous aspects of the ACA were delayed, including the employer shared responsibility provision (it took effect in 2015, rather than 2014, and wasn't fully phased in until 2016), and the termination of non-grandfathered, non-ACA-compliant plans that were issued prior to 2014. These plans are transitional, or " grandmothered," and they're allowed to continue in force until if and when the federal government says otherwise, at the discretion of states and health insurers.

The Cadillac Tax was repeatedly delayed and ultimately repealed. The Health Insurance Tax and the Medical Device Tax have also been repealed.

And although the individual mandate (individual shared responsibility provision) was implemented and continues to exist, the tax levied by the IRS for non-compliance was eliminated after the end of 2018, under the terms of the GOP's Tax Cuts and Jobs Act.

Legal Challenges to the ACA

The ACA has endured numerous legal challenges over the years. In 2018, a lawsuit was filed (Texas v. Azar, now called California v. Texas) that threatened to overturn the entire law. The lawsuit stemmed from the fact that an earlier lawsuit (the one in which the Supreme Court ruled in 2012 that the ACA was constitutional but that states could not be forced to expand Medicaid or lose their federal Medicaid funding) determined that the enforcement mechanism for the individual mandate constituted a tax rather than a penalty.

That tax was eliminated (effective January 2019) by the GOP tax bill that was enacted in late 2017. Soon thereafter, a group of 20 GOP-led states sued to overturn the ACA, arguing that without the tax, the rest of the law could no longer be considered constitutional. Legal scholars generally agreed that this was a stretch, but in December 2018, a federal judge ruled that the ACA should indeed be overturned.

Under the Trump administration, the Department of Justice declined to defend the ACA, and agreed with the judge's ruling—that the ACA should be overturned in full. Oral arguments in the appeal were heard in July 2019. Later that year, a federal appeals court ruled that the law requiring health insurance was unconstitutional without a tax penalty but stopped short of invalidating the rest of the law, instead sending it back to the lower court.

Under the Biden administration, the Department of Justice changed its stance on the ACA and defended the ACA's ability to stand without the mandate. The Supreme Court heard oral arguments in November 2020, and issued a ruling in June 2021 that upheld the ACA. That was the third time the ACA had come before the Supreme Court (the other cases were in 2012 and in 2015), and the third time that the court upheld the ACA.

Summary

The Affordable Care Act, also known as Obamacare, has changed numerous aspects of the American health care and health coverage systems. The effects are most obvious in the individual/family health insurance market, where federal regulations were scant prior to the ACA. Under the ACA, these health plans are now guaranteed-issue (but only available during limited windows each year), must cover certain essential health benefits with a cap on out-of-pocket costs, and cannot have benefit caps. The ACA also created health insurance exchanges/marketplaces where people can shop for coverage and receive income-based financial assistance.

The ACA also addressed other issues, such as value-based care, a requirement that large employers offer affordable coverage to their full-time workers, and closing the Medicare Part D donut hole.

A Word From Verywell

If you have self-purchased health coverage—or might need it in the future—the ACA ensures that you can't be rejected due to a pre-existing medical condition. And the ACA's income-based subsidies mean that self-purchased coverage can be as affordable as employer-subsidized insurance (or even more affordable, depending on the circumstances and the coverage). This provides a lot of peace of mind and might make it easier for you to transition away from an employer-sponsored health plan if necessary.