Obamacare’s Effect on Income Inequality - Good or Bad?

Written by: PeopleKeep Team
Originally published on April 7, 2015. Last updated March 2, 2016.

Like a dedicated hawk watches a scurrying mouse, Americans have been keeping a sharp eye out on Obamacare (also called the Affordable Care Act). Why? Since Obamacare’s introduction in 2010, everyone has anxiously waited to find out whether it’s effective or not and what impact it is having on our country.

Whether you’re in favor of Obamacare or not, it has certainly made a splash in the country’s healthcare system. The question is, have the effects been good or bad? And more specifically, what have the effects of Obamacare been on income inequality? In this article, we’ll discuss several findings from in regards to the potential effects of Obamacare on income inequality.iStock_000033404622_Large_1

Key Findings

  • Obamacare will improve the well-being and incomes of Americans in the bottom fifth of the income distribution.

  • Brookings projects that incomes in the bottom one-fifth of the distribution will increase almost six percent. Those in the bottom one-tenth of the distribution will increase more than seven percent.

  • Most Americans already have health insurance coverage and will be left largely unaffected by Obamacare.

  • Those who gain subsidized insurance will see bigger percentage gains in their income.

How Obamacare Affects Income Inequality

Before getting into the details, you may be wondering how Obamacare would affect income inequality. This is a valid question to ask. In short, incomes are affected by Obamacare simply because of health insurance premium assistance and expanded Medicaid coverage. Costs for these provisions are offset by taxes distributed across the population. This, in turn, affects income. And depending on each individual’s situation, it can help or hurt their income.

Obamacare Will Improve Incomes of Americans in Bottom 2/10 of Income Distribution

The goal of Obamacare is to make health coverage more affordable by reforming insurance and by subsidizing the health insurance premiums of low and moderate income families.

New subsidies (tax credits) are created  by means of an expansion of Medicaid and the introduction of refundable tax credits for the purchase of insurance through new state Health Insurance Exchanges. Since Medicaid is costless to the low-income population and because the refundable tax credits are meant for families with incomes below the Federal Poverty Line (FPL), most beneficiaries of government spending fall under the bottom half of the income distribution.

Income Also Affected by Definition of Household Income

According to Brookings, the Census Bureau’s “money income” measure does not define health insurance as income. As such, Obamacare has little effects on income including those at the very bottom of the income distribution. Those at the bottom of the income distribution may see a small decline or increase in money incomes.

Even when using a more expansive definition of income which counts part of the value of insurance, Americans in the bottom tenth of the distribution gain very little. This result says more about the way income is defined than it does about how Obamacare affects low-income households.

Experts Faced with Challenge of Income Definitions

Experts see the shortcomings of income definitions which exclude health insurance, however finding a solution of how to include it poses a challenge. The Census Bureau sometimes uses a term called “fungible income” when the value of free or subsidized health protection in income is included. The fungible value of insurance included the full premium contribution made by employers in behalf of their workers.

This also includes some or all of the subsidies provided by the government. However, this only includes families who have enough cash income to pay for basic food and housing.

When income exceeds this threshold, part or all of the value of government financed health benefits is included. In the case that a family does not have enough cash income to pay for basic food and shelter needs, no part of the value of government insurance is counted as income.

Related: After 5 Years of Obamacare - What's the Verdict? [ACA Series]

Employer-Sponsored Health Insurance Changes will Affect Income 

According to the Brookings report,  experts project enrollment in employer-sponsored health insurance will decline in the coming years. Some workers will gain employer coverage while others will enroll in existing employer plans because of the penalties faced if they choose not to participate.

Some employers may drop coverage for their part-time employees while others will leave their employer plan simply because less expensive coverage is available elsewhere. Because of these various factors, employer-provided health insurance is expected to shrink 5.9 million, or just over three percent in the population under 65.

The change in employer-provided health insurance will result in changes to money income as well as on income measured under more comprehensive definitions. Basically, if an employer’s health costs fall, many will pass the savings along to their workers in the form of higher wages.

Related: Is Price Stability Needed For The ACA To Succeed? [ACA Series]


Obamacare’s primary function, according to the administration, is to provide affordable healthcare to millions of Americans. However, whether intentional or not, Obamacare’s inadvertent effect on income inequality is prevalent for many Americans - namely that Obamacare will improve the well-being and incomes of Americans in the bottom fifth of the income distribution.

What is your opinion on how Obamacare is affecting income inequality? Has it helped it or made it worse? Comment below.

Originally published on April 7, 2015. Last updated March 2, 2016.


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