Obama’s healthcare shake-up

Why all the fuss? This week, America's Supreme Court rejected Republican claims that the Patient Protection and Affordable Care Act (PPACA), known informally as Obamacare, is unconstitutional. That allows President Obama to implement the key piece of legislation from his four-year term.

The wide-ranging health bill is over 2,700 pages long and attempts to reform many aspects of the world's largest health market. Its most far-reaching aspect is that, by levying a punitive tax on those who don't buy insurance, it changes the nature of American healthcare from a voluntary private contract between an individual and an insurer to a more universal system, such as those found in western Europe.

Who is covered at the moment?

America spends 18% of GDP on health, twice the level spent in Britain. About half of the money comes from the state. It pays for Medicaid, which provides care for the very poor or those with severe special needs. At present it, and a similar child-focused programme, provide basic care for 60 million Americans.

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That might sound like a lot, but it's still less than 20% of the population. The state also provides subsidised medical care for the over-65s Medicare. This helps another 50 million Americans, but only covers certain needs and requires individual contributions.

What about everyone else? Those under 65 who don't qualify for Medicaid have to fend for themselves and take out insurance with a private provider, either individually or as a benefit offered by their employer. American health costs are the highest in the world. World Health Organsiation data show that in 2010 private spending worked out at $3,921 per capita, compared to about $560 in Britain.

As a result, many people choose not to take out insurance and around 50 million people have no cover. If these people fall seriously ill, they are still treated by hospitals and these costs are passed on to existing policyholders through higher premiums.

Even if you can afford insurance, it's not always that helpful. Insurers place limits on the total cost of care you can receive in a given year, or even in the course of your lifetime. If you are seriously ill and breach that limit, your insurer may abandon you. Insurers can also refuse people with pre-existing conditions.

How will the new Act help?

Obama's plan is to widen the market by forcing everyone to take up health insurance. Those who don't will be taxed more heavily. It's estimated the move will add 30 million new policyholders. Critics say many of the new policyholders will be young, healthy people who didn't previously feel the need for insurance they should prove profitable for the insurance firms.

Obama argues these profits will be reinvested in caring for the sick because the Act phases out spending limits and forces firms to insure people with pre-existing conditions. His Act also looks to lower healthcare costs. It forces states to establish exchanges where employers and individuals can bid for insurance cover. The idea is that firms will compete to win share in the new, larger market and drive down prices.

Other cost-saving measures include wider approval of cheaper generic drugs, a focus on preventative care and establishing a new non-profit body to work out the most cost-effective treatments for government health programmes. The scheme will cost $1.7trn upfront, but the Congressional Budget Office estimates that improved efficiency will save $210bn a year, meaning that by 2021 it will have paid for itself.

How did this Act end up in court?

Obama first passed the Act in 2010, but 26 Republican states challenged the law through the courts claiming that forcing people to buy insurance was contrary to the constitution. The Supreme Court upheld this objection, but ruled that the PPACA was still legal because the means being used to encourage people to buy insurance (levying a special tax on those who opt out) falls within the remit of the federal government.

Ironically, when Obama persuaded Congress to pass the Act, he was adamant it was not a tax. The real dispute, says The Economist, is "about whether wealthy citizens should be required to pay for poor citizens to get health insurance [and] healthy people [for] sick people to get health care".

Republicans have now made it a key election issue, and Mitt Romney has promised to repeal the Act if elected in November. However, even if Romney manages to win the election, he is unlikely to gain the type of "filibuster-proof 60-vote majority" needed to repeal the whole Act, says Barron's. That means "the basic points of the law would remain in effect" particularly as Romney himself implemented a similar scheme in 2006 as governor of Massachusetts.

How do the markets see it?

The Act is good news for hospital chains, says Kopin Tan in Barron's. Bad debts often exceed 10% of revenues, so "the promise of universal health coverage and fewer uninsured patients showing up in emergency rooms" is good for them. Indeed, shares in hospital chains gained following the news.

The market also seems more optimistic than many Republicans that the Act will bring down insurance costs. Shares in large, diversified insurers fell as investors bet that the new state-based exchanges would hit their profits.

Pharmaceutical firms with strong sales to government health programmes also fell, showing that investors feel the new non-profit body will succeed in getting the government a better deal for its drugs.