Obamacare Basics: What is the Affordable Care Act?

The Patient Protection and Affordable Care Act (ACA) is federal legislation that was signed into law in 2010. This law, commonly referred to as "Obamacare," made sweeping changes to how health insurance is procured and paid for.

This article provides a concise overview of Obamacare, how it works, and how it affects you. To learn more about your rights and responsibilities as an employee, see our section on Health Insurance Benefits.

What Is the Affordable Care Act in Simple Terms?

The Affordable Care Act is an act that was drafted to reduce health insurance costs to eligible Americans through the shared responsibility of the government, employers, and policyholders. It also aims to prohibit the restrictive practices of the healthcare industry. 

How Does the Affordable Care Act Work?

When created, the Affordable Care Act was meant to reduce medical costs under a few principles, including an individual mandate to purchase insurance (repealed), subsidized premiums, and new regulations for the health insurance industry.

Subsidized Costs

Obamacare subsidizes the costs of premiums to help lower-income people pay for insurance. It also makes payments to insurance providers to keep their deductibles low.

Insurance Regulations

The ACA added a significant number of insurance requirements, including prohibiting insurance providers from the following activities:

• Canceling policies when policyholders become sick
• Placing a lifetime monetary limit on hospital stays or other benefits deemed "essential" in new policies
• Denying coverage to individuals for pre-existing conditions
• Refusing to offer the same premium within the same age and geographical group regardless of gender and pre-existing conditions, except tobacco use

Individual Mandate

Initially, the ACA had a penalty for people who did not purchase a health insurance plan (otherwise known as the individual mandate). The cost of insurance and healthcare for people who were unable to pay was meant to be offset in part by this mandate. In 2017, however, the individual mandate was repealed. More on this below.

Key Elements of the Affordable Care Act

The ACA has made sweeping changes to the U.S. healthcare system. The key elements that garnered the most attention include:

• Allowing dependents to be covered under their parents' insurance plans until they turn 26
• Allowing businesses and individuals to compare plans and enroll for coverage through state health insurance exchanges (the "Health Insurance Marketplace")
• Expanding Medicaid eligibility to include those earning 133% or less of the federal poverty level, including adults without dependents, in participating states
• Making subsidies available (in the form of refundable tax credits) on the state health insurance exchanges for individuals with a household income up to 400% of the official poverty level
• Enforcing minimum standards for health insurance policies
• Prohibiting employers from requiring employees to wait more than 90 days for health insurance eligibility

Other Important Provisions of Obamacare

If you already have insurance coverage through the ACA, these provisions may impact you:

• Insurers are required to provide you with a standardized, plain-language summary of benefits (which also helps with plan comparisons).
• Rate increases of more than 10% must be publicly justified; 80% of premiums must be spent on actual healthcare services.
• Insurers may not cancel your plan in response to an illness.
• Certain types of preventive care must be covered at no additional cost to you.
• You are free to choose any physician within the plan's network and may use an out-of-network emergency room without penalty.
• Annual and lifetime dollar limits on care are prohibited.
• You are granted the right to appeal whenever an insurer denies payment for healthcare services.

Obamacare Affordability and Options

As the bill's title would suggest, the Affordable Care Act intends to make healthcare coverage more accessible and affordable to more Americans. Visit the Health Insurance Marketplace and provide information about your household (size, annual income) to find out whether you qualify for free or low-cost coverage.

The Marketplace offers four categories of coverage to help with comparisons: Bronze, Silver, Gold, and Platinum. Bronze plans typically charge the lowest premiums but pay a smaller share of costs when care is rendered. Platinum plans typically charge the highest monthly premiums, offer the lowest out-of-pocket costs, and pay more of the costs if you need expensive medical care.

Those with an income below a certain level may be eligible for Medicaid or the Children's Health Insurance Program (CHIP).

The ACA's Individual Mandate and Repeal

Perhaps the most controversial provision of Obamacare was the individual mandate, the now-repealed requirement that nearly every individual in the U.S. have healthcare coverage. The reasoning behind this was that young, relatively healthy people who pay regular insurance premiums ultimately help cover the costs of older and less-healthy individuals.

In addition, since insurance companies may not refuse to cover those with pre-existing conditions, the mandate theoretically would discourage people from simply waiting until they had a healthcare emergency.

However, the tax overhaul passed by Congress and signed into law by President Donald Trump in 2017 repealed the individual mandate. The tax overhaul went into effect in 2019.

Supreme Court Challenges to the Affordable Care Act

The U.S. Supreme Court took up two separate challenges to the ACA, decided in 2012 and 2015 (respectively), but the justices ultimately upheld key parts of the Act. In National Federation of Independent Business v. Sebelius the Court ruled that the penalty paid by those without insurance technically was a tax and thus valid under the Constitution's taxing and spending clause.

In King v. Burwell, the Court ruled that states without their own healthcare exchanges were nevertheless entitled to federal subsidies.

Is the Affordable Care Act Still in Effect?

In 2020, the Supreme Court agreed to review the law in California v. Texas again, putting the law's constitutionality under question.

The case arose after 20 states, led by Texas, sued the federal government in February 2018, seeking to have the entire act struck down. The 5th Circuit Court of Appeals concluded the individual mandate was unconstitutional. It also ordered the district court to hear the matter again and decide whether any provisions of the ACA could remain without the individual mandate.

However, before the district court could make a ruling on these issues, the Supreme Court agreed to hear the case in fall 2020. The current law remains in effect while the litigation is pending.

Need Help Understanding the ACA? Talk to an Attorney

The ACA, commonly referred to as "Obamacare," has gone through many twists and turns. Challenges to the law have molded it into something quite different than its original conception, so you may be left wondering what your health insurance coverage looks like. Consider speaking with a healthcare law attorney if you have any additional questions or concerns about the Affordable Care Act.