What Is the Affordable Care Act?

Updated December 21, 2022

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The Affordable Care Act (ACA) is the comprehensive healthcare reform legislation signed into law in 2010 by President Barack Obama. The ACA expanded access to health insurance by lowering Medicaid eligibility requirements, creating health insurance exchanges, implementing an individual mandate that requires Americans to have health insurance, and prohibiting insurance companies from denying coverage to anyone with a pre-existing condition.

If you don’t have employer-sponsored health insurance or would have once been considered “uninsurable” because of a pre-existing condition, the ACA means you can get health insurance coverage. Here’s how it works.

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The Affordable Care Act, explained

The Affordable Care Act is the signature legislation from the Obama administration, which is why it is often referred to as Obamacare. The aim of this legislation was to increase access to health insurance since the employer-sponsored health insurance model can leave many Americans without coverage.

Prior to the passage of the ACA, it was often impossible for people to qualify for or afford health insurance if they didn’t have access to an employer-sponsored plan. As of 2010, 48.2 million Americans had no health insurance coverage, as reported by the Department of Health and Human Services. By 2016, that number had dropped to 28.2 million uninsured people. While the number of uninsured Americans went up to 30 million as of 2020, the ACA has helped to widely expand insurance access.[1]

Three main components of the ACA aimed to reduce healthcare costs:

  1. Medicaid expansion: The ACA allowed states to expand their Medicaid coverage so that anyone with an income equal to 138% of the federal poverty level would be eligible.[2] Not all states agreed to this expansion, and there are currently 12 states that have maintained their original Medicaid eligibility criteria.

  2. Health insurance marketplace: The legislation set up an online marketplace where individuals and families can compare health insurance options and enroll in programs. This helps reduce costs since it allows consumers to compare prices in a transparent system.[3]

  3. Individual mandate: Young and healthy people are less likely to need medical care, which means they’re more likely to forgo health insurance if they’re not required to carry it. When an injury or illness forces uninsured people to use healthcare services, it raises costs for everyone. To help keep costs low, the ACA required everyone to enroll in a health insurance plan or face a tax penalty.

In addition to these components, the ACA also:

  • Mandated that young adults could stay on their parents’ health insurance until age 26

  • Prohibits insurance companies from disqualifying anyone with pre-existing conditions

  • Requires all ACA-compliant plans to meet certain essential coverage requirements

Although a Kaiser Family Foundation survey found that 55% of the public currently views the ACA favorably,[4] passing this legislation was a rough road. It passed in the Senate via budget reconciliation, which only requires a 51-vote majority. When it subsequently went to the House of Representatives for approval, every Republican and 34 Democrats voted against it, but it narrowly passed in a 219-212 vote.

Learn More: Do I Need Health Insurance Coverage?

The Individual Mandate: What to know

Since its passage and implementation, there have been dozens of attempts to repeal the ACA, all of which have failed. But the Tax Cuts and Jobs Act of 2017 reduced to zero the tax penalty for not having health insurance as of Dec. 31, 2018.[5]

Still, some states have reinstated their own individual mandates with penalties for failing to have health insurance. The table below lists these states and one district, as well as information about their mandates and penalties.

StateEffective DateMandatePenalty
CaliforniaJan. 1, 2020
  • Have qualifying health coverage.
  • Obtain an exemption if you don’t want to buy health insurance.
  • Pay a penalty for being uninsured.
$800–$2,400 based on income and family size
District of ColumbiaJan. 1, 2019
  • Have minimal essential healthcare coverage.
  • Obtain a coverage exemption.
  • Pay a penalty for being uninsured.
Equal to the penalty levied by the ACA prior to Dec. 15, 2017
MassachusettsDec. 31, 2007
  • Most people over 18 who can afford health insurance must have it.
  • Plans must meet Minimum Creditable Coverage requirements.
  • Tax penalty for every month you go uninsured.
Varies depending on income, age, and family size. Can’t exceed half the cost of the lowest-priced plan available to an individual through the Massachusetts marketplace, ConnectorCare
New JerseyJan. 1, 2019
  • Carry minimum essential health coverage.
  • Qualify for an exemption if you don’t have coverage.
  • Pay a tax penalty for failing to have coverage.
Based on income and family size; ranges from $695 for an individual to $19,793 for families with incomes over $400,000
Rhode IslandJan. 1, 2020
  • Must have qualifying health coverage or obtain an exemption.
  • Pay a state tax penalty for failing to have coverage.

Calculate using three options, and choosing the higher amount.

  • Either 2.5% of your Modified Adjusted Gross Income OR
  • A flat dollar amount up to $2,085, based on the number of family members uninsured and the number of months without insurance OR
  • The average annual amount of a Bronze Plan on the state marketplace, HealthSource RI ($3,360)

What are the key features of the ACA?

The ACA provides a number of different features that are designed to help Americans afford health insurance and medical costs. These include:

  • The Health Insurance Marketplace: This online marketplace allows individuals and families to purchase and enroll in health insurance. The marketplace also set up an easy-to-understand comparison system — with bronze, gold, silver, and platinum plans — to make it simpler for consumers to compare apples to apples.

  • Patient’s Bill of Rights: This feature is designed to ensure that patients get the care they need without their insurance company denying or rescinding coverage, requiring prior approval, imposing lifetime limits, or excluding people with pre-existing conditions. The Patient’s Bill of Rights also requires insurers to put toward direct medical care at least 80% to 85% (depending on the insurer’s size) of premiums paid by covered members.

  • Medicare provisions: Medicare must now provide free preventive care screenings for certain ailments, such as breast and colorectal cancer, diabetes, and heart disease.

  • Tax credits for middle- and low-income families: Individuals and families with an income falling between 100% and 400% of the federal poverty level are eligible for a tax credit, although some taxpayers with incomes above 400% of the federal poverty level may also qualify for a credit. The only way to receive this tax credit is to purchase your health insurance through the Health Insurance Marketplace.[6]

  • Expansion of Medicaid: Each state has its own eligibility rules for Medicaid, which may include factors such as income, household size, disability, and family status. The ACA provided states with federal funding to expand Medicaid eligibility so that any resident who earns no more than 138% of the federal poverty level could qualify for the program. However, 12 states have refused to accept the Medicaid expansion, meaning their residents still need to meet the state’s original requirements.

  • Annual and lifetime limits: The ACA prohibits health insurance companies from placing either annual or lifetime benefit limits on essential healthcare spending. Before the ACA, insurers could place a cap on how much they would spend on your care, after which point you would have to pay out of pocket to continue to receive medical care.

  • Pre-existing conditions: Under the ACA, insurance companies can no longer deny coverage or charge a higher premium to anyone because of a pre-existing condition.

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Who does the Affordable Care Act cover?

The Affordable Care Act has expanded healthcare coverage to a number of individuals and families who might not otherwise be able to afford health insurance. These include:

  • People without employer-sponsored coverage

  • People with pre-existing conditions

  • Low-income individuals who would not otherwise qualify for Medicaid

  • Young adults under the age of 26

  • Anyone retiring before reaching Medicare-eligibility at age 65

Check Out: Are Health Insurance Premiums Tax-Deductible?

How does the ACA affect your health insurance?

Even if you receive your health insurance through your employer rather than purchasing it through the Health Insurance Marketplace, the ACA affects your experience. That’s because all health insurance purchased after March 23, 2010, must meet the ACA requirements for coverage.

These requirements are slightly different depending on whether you purchase coverage as an individual, receive it from an employer with fewer than 50 employees (small-group coverage), or from an employer with more than 50 employees (large-group coverage).

For individual and small-group coverage, insurance plans must meet the following requirements:

  • Guaranteed issue: Eligible applicants or businesses are guaranteed coverage.

  • Pre-existing condition coverage: Applicants can’t be denied coverage or charged higher premiums if they have pre-existing conditions.

  • No lifetime limits: Individual coverage may have annual limits, but small-group coverage cannot. Neither may impose lifetime benefit limits.

  • Essential health benefits coverage: The ACA mandates that all insurance cover these 10 essential benefits:[7]

    • Outpatient care (also called ambulatory patient services)

    • Emergency services

    • Hospital care, such as surgery or overnight stays

    • Pregnancy, maternity, and newborn care

    • Mental health

    • Prescription drugs

    • Rehabilitative and habilitative services for recovery

    • Laboratory services

    • Preventive care, wellness care, and care for chronic conditions

    • Pediatric care

Large-group coverage has slightly different requirements. These include:

  • Requirement to sponsor health insurance: All employers with 50 or more full-time employees (defined as anyone working 30+ weekly hours) must offer health insurance to employees.

  • Year-round guaranteed issue: Large-group coverage must allow new employees to enroll at any time throughout the year and not force them to wait for an open enrollment period before getting coverage.

  • Minimum value: Large-group coverage must pay for at least 60% of average healthcare costs for each covered person.

  • Essential benefits: Large groups aren’t required to provide coverage for the 10 essential benefits mandated by the ACA, but they must cover certain types of preventive care, including cancer and infectious disease prevention.

What are the pros and cons of the Affordable Care Act?

While the Affordable Care Act did expand health insurance coverage to millions of Americans, it’s not without drawbacks. Here are some of the benefits and downsides of this legislation:

Pros

  • Expanded healthcare access to approximately 20 million Americans.

  • Ended the practice of denying coverage or increasing premiums for pre-existing conditions.

  • Ended lifetime benefit limits.

  • Increased coverage for preventive care.

Cons

  • Twelve states have refused to accept federal funds to expand Medicaid coverage, meaning at least 3.7 million people who would otherwise be eligible are without coverage.[8]

  • Insurance premiums sometimes increased for those who were already insured.

  • The end of the individual mandate reduces the pool of lower-cost policyholders, which may increase premiums overall.

  • Some insurance companies made their networks smaller to affordably comply with ACA requirements, meaning patients had fewer in-network providers to choose from.

How to buy insurance on the open marketplace

To buy insurance on the marketplace, these are the steps you’ll need to follow:

  1. Navigate to HealthCare.gov to apply online. You can also get local help in your area if you need it.

  2. Open enrollment is Nov. 1 to Jan. 15. Apply by Dec. 15 for coverage that starts on Jan. 1. Apply by Jan. 15 for coverage that starts on Feb. 1. You may be eligible for a special enrollment period if you lost other coverage, moved, got married, or had a baby.

  3. See if you qualify for a tax credit. If you do qualify, applying for a plan through HealthCare.gov is the only way to receive the credit. If you don’t qualify, you’ll need to purchase your health insurance through an insurance company, an agent or broker, or an online health insurance seller.

  4. Preview personalized plans and prices. The website will provide previews based on your income and household size.

  5. Complete your enrollment. You’ll do this online.

  6. Pay your first premium. You must pay this for your coverage to start.

If you decide to change your plan, you have until Dec. 15 for a new plan that starts Jan. 1, and until Jan. 15 for a new plan that starts Feb. 1.

Learn More: When Is Health Insurance Open Enrollment?

Affordable Care Act FAQs

Here are several of the most common questions about the Affordable Care Act.

  • The individual mandate was a requirement that all Americans carry valid health insurance, or face a tax penalty. This was part of the original ACA legislation, but the tax penalty was set to zero effective Dec. 31, 2018. Although the mandate is still in place, there’s no longer a federal tax penalty for failing to have health insurance.

  • The tax penalty for not having health insurance was set as a flat dollar amount per adult and a lower flat dollar amount per child. As of 2018, the last year that the penalty was still in place, the adult fee was $695 and the child fee was $347.50. However, the individual mandate was repealed in 2017, effective 2019. There’s no longer any federal tax penalty for not having health insurance.

  • The ACA provides premium subsidies to Americans with incomes between 100% and 250% of the federal poverty level. These cost-sharing subsidies raise the actuarial value of your plan. That is, it raises the average amount of money your insurer pays for your plan. (For instance, if you qualify for a subsidy, instead of paying for 70% of covered services, your insurer would pay 73%, 87%, or 94%, depending on your income level.)

    This means your co-insurance, copays, deductibles, and maximum out-of-pocket costs are reduced.

  • As President Barack Obama’s signature legislation, the Affordable Care Act is often called Obamacare. You may also hear it referred to as the ACA or the PPACA (for the Patient Protection and Affordable Care Act). All of these nicknames refer to the same piece of legislation.

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Sources

  1. DHHS Office of Health Policy. "TRENDS IN THE U.S. UNINSURED POPULATION, 2010-2020." Accessed December 19, 2022
  2. HealthCare.gov. "Medicaid expansion & what it means for you." Accessed December 19, 2022
  3. U.S. Department of Health and Human Services. "What is the Health Insurance Marketplace?." Accessed December 19, 2022
  4. Kaiser Family Foundation. "5 Charts About Public Opinion on the Affordable Care Act." Accessed December 19, 2022
  5. IRS. "Individual Shared Responsibility Provision." Accessed December 19, 2022
  6. HealthCare.gov. "Premium tax credit." Accessed December 19, 2022
  7. HealthCare.gov. "What Marketplace health insurance plans cover." Accessed December 19, 2022
  8. Urban Institute. "3.7 Million People Would Gain Health Coverage in 2023 If the Remaining 12 States Were to Expand Medicaid Eligibility." Accessed December 19, 2022
Emily Guy Birken
Emily Guy Birken

Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson.

Her work has appeared on The Huffington Post, Business Insider, Kiplinger's, MSN Money, and The Washington Post online.

She is the author of several books, including The 5 Years Before You Retire, End Financial Stress Now, and the brand new book Stacked: Your Super Serious Guide to Modern Money Management, written with Joe Saul-Sehy.

Emily lives in Milwaukee with her family.