What Is the Affordable Care Act (ACA)?

The Affordable Care Act (ACA) is the comprehensive healthcare reform signed into law by then-President Barack Obama in March 2010. Formally known as the Patient Protection and Affordable Care Act and commonly referred to as Obamacare, the law includes a list of healthcare policies intended to expand access to health insurance to millions of uninsured Americans.

The law expanded Medicaid eligibility, created health insurance exchanges, mandated that Americans purchase or otherwise obtain health insurance, and prohibited insurance companies from denying coverage due to preexisting conditions.

Understanding the Affordable Care Act (ACA)

The ACA was designed to reform the health insurance industry and help reduce the cost of health insurance coverage for individuals who qualify. The law includes premium tax credits and cost-sharing reductions to help lower expenses for lower-income individuals and families.

The ACA requires most insurance plans, including those sold on the Health Insurance Marketplace, to cover a list of preventive services at no cost to policyholders that include checkups, patient counseling, immunizations, and numerous health screenings.

All ACA-compliant health insurance plans must cover specific “essential health benefits,” such as emergency services, family planning, maternity care, hospitalization, prescription medications, mental health services, and pediatric care.

The law allows states to extend Medicaid coverage to a wider range of people. As of September 2022, 39 states and the District of Columbia had exercised that option.

Every year, there is an open enrollment period on the Health Insurance Marketplace during which people can buy or switch insurance plans. Enrollment outside of the open season is allowed only for those whose circumstances change, such as marrying, divorcing, becoming a parent, or losing a job that provided health insurance coverage.

Key Features of the Affordable Care Act

Provisions included in the ACA expand access to insurance, increase consumer protections, emphasize prevention and wellness, improve quality and system performance, expand the health workforce, and curb rising healthcare costs.

Expand Access to Insurance

The ACA requires employers to cover their workers and provides tax credits to certain small businesses that cover specified costs of health insurance for their employees. It created state- or multistate-based insurance exchanges to help individuals and small businesses purchase insurance. 

The law expanded Medicaid coverage for low-income individuals and allows young adults to remain on parents’ policies until age 26.

Part of the ACA until 2017 was the individual mandate, a provision requiring all Americans to have healthcare coverage, either from an employer or through the ACA or another source, or face tax penalties.

Increase Consumer Insurance Protections

The ACA prohibits lifetime monetary caps on insurance coverage, limits the use of annual caps, and establishes state rate reviews for insurance premium increases. It prohibits insurance plans from excluding coverage for children with preexisting conditions and canceling or rescinding coverage.

Prevention and Wellness

The Prevention and Public Health Fund, established under the ACA, provides grants to states for prevention activities, such as disease screenings and immunizations, and the National Prevention, Health Promotion, and Public Health Council addresses tobacco use, physical inactivity, and poor nutrition.

The ACA requires insurance plans to cover preventive care such as immunizations; preventive care for children; screening for certain adults for conditions such as high blood pressure, high cholesterol, diabetes, and cancer; and a public education campaign for oral health.

Improve Health Quality and Curb Costs

The ACA requested investments in health information technology. It addressed guidelines to reduce medical errors and create payment mechanisms to improve efficiency and results and improve care coordination among providers.

The law requires oversight of health insurance premiums and practices, reducing healthcare fraud and uncompensated care to foster comparison shopping in insurance exchanges to increase competition and price transparency.

Pros and Cons of the Affordable Care Act

Updates to the Affordable Care Act

With his election in 2016, then-President Donald Trump launched efforts to repeal and replace the ACA, stating that the United States should delay “the implementation of any provision or requirement of the [Patient Protection and Affordable Care] Act that would impose a fiscal burden on any State.”

In December 2017, the Tax Cuts and Jobs Act (TCJA) removed the penalty for individuals not having health insurance and substantially scaled back the outreach program to help Americans sign up for the ACA, cutting the enrollment period in half. By 2018, the number of Americans covered under the ACA had dropped to 13.8 million from 17.4 million in 2015, according to a report from the Kaiser Family Foundation, a healthcare research organization.

In 2021, President Biden signed an executive order to focus on the “rules and other policies that limit Americans’ access to health care,” prompting federal agencies to examine five areas, including preexisting conditions, policies undermining the Health Insurance Marketplace, enrollment roadblocks, and affordability. COVID-19 relief legislation, the American Rescue Plan Act (ARPA), extended eligibility for ACA health insurance subsidies to those buying their health coverage on the Marketplace with incomes over 400% of poverty.

With the passage of the Inflation Reduction Act, signed into law by Biden on Aug. 16, 2022, financial assistance was extended for people enrolled in the ACA through 2025 instead of 2022. It also expands eligibility, allowing more middle-class citizens to receive premium assistance. The legislation passed in both the House of Representatives and the Senate.

The Bottom Line

The Patient Protection and Affordable Care Act (ACA) was passed in 2010 and is commonly known as Obamacare. It extended healthcare coverage to millions of previously uninsured Americans. The ACA launched the Health Insurance Marketplace, through which eligible people may find and buy health insurance policies.

All ACA-compliant health insurance plans, including those sold through the Marketplace, must cover several essential health benefits. The ACA has continued to evolve through three presidencies.

What Is Acceptable Quality Level (AQL)?

The acceptable quality level (AQL) is a measure applied to products and defined in ISO 2859-1 as the “quality level that is the worst tolerable.” The AQL tells you how many defective components are considered acceptable during random sampling quality inspections. It is usually expressed as a percentage or ratio of the number of defects compared to the total quantity.

How Acceptable Quality Level (AQL) Works

Goods in a sample are tested at random, and if the number of defective items is below the predetermined amount, that product is said to meet the acceptable quality level (AQL). If the acceptable quality level (AQL) is not reached for a particular sampling of goods, manufacturers will review the various parameters in the production process to determine the areas causing the defects.

As an example, consider an AQL of 1% on a production run. This percentage means that no more than 1% of the batch can be defective. If a production run is composed of 1,000 products, only 10 products can be defective. If 11 products are defective, the entire batch is scrapped. This figure of 11 or more defective products is known as the rejectable quality level (RQL).

The AQL is an important statistic for companies seeking a Six Sigma level of quality control, which is a quality-control methodology developed in 1986 by Motorola, Inc. AQL is also known as the acceptable quality limit.

Industry Differences in AQL Standards

The AQL of a product can vary from industry to industry. For example, medical products are more likely to have more stringent AQL because defective products can result in health risks.

In contrast, a product with benign side-effects from a possible defect may have a less strict AQL, such as the remote control for a TV. Companies have to weigh the added cost associated with the stringent testing and potentially higher spoilage due to a lower defect acceptance with the potential cost of a product recall.

Customers would, of course, prefer zero-defect products or services; the ideal acceptable quality level. However, sellers and customers usually try to arrive at and set acceptable quality limits based on factors typically related to business, financial, and safety concerns.

Using AQL Tables

AQL tables (also sometimes called AQL charts) are designed to allow users to reference a standard for what qualifies as an acceptable number of defects in manufacturing. They allow a person to see how many defects would be allowed for a company to achieve a certain AQL. The tables are part of ISO 2859.

So for example, let’s say a company orders 30,000 hats from a clothing manufacturer that will be produced in one batch, and the buyer and producer have agreed on AQL 0.0 for critical defects, AQL 3.0 for major defects, and AQL 5.0 for minor defects. Referencing the AQL tables would allow the buyer and producer to determine how many hats would need to be inspected to ensure that the agreed upon AQL is being met during production.

AQL Defects

Instances of failure to meet customer quality requirements are termed as defects. In practice, there are three categories of defects:

1. Critical defects: Defects that, when accepted, could harm users. Such defects are unacceptable. Critical defects are defined as 0% AQL.
2. Major defects: Defects usually not acceptable by the end-users, as they are likely to result in failure. The AQL for major defects is 2.5%.
3. Minor defects: Defects not likely to reduce materially the usability of the product for its intended purpose but that differ from specified standards; some end users will still buy such products. The AQL for minor defects is 4%.

AQL in Practice

Acceptable quality level (AQL): AQL is typically considered to be the worst quality level that is still considered satisfactory. It is the maximum percent defective that can be considered satisfactory. The probability of accepting an AQL lot should be high. A probability of 0.95 translates to a risk of 0.05.

Rejectable quality level (RQL): This is considered an unsatisfactory quality level and is sometimes known as lot tolerance percent defective (LTPD). The consumer’s risk has been standardized in some tables as 0.1. The probability of accepting an RQL lot is low.

Indifference quality level (IQL): This quality level is somewhere between AQL and RQL. Different companies maintain different interpretations of each defect type. However, buyers and sellers agree on an AQL standard that is appropriate to the level of risk each party assumes. These standards are used as a reference during a pre-shipment inspection.

The Bottom Line

AQL can be a useful figure to help ensure that large orders for manufacturing are completed to a level of standard that a buyer demands. It also allows the seller to be efficient in their production while maintaining the standard set by the buyer. It is generally used in large-scale orders of production, and is helpful in keeping both buyer and seller happy while producing good quality products.

What Is Alpha?

Alpha (α) is a term used in investing to describe an investment strategy’s ability to beat the market, or its “edge.” Alpha is thus also often referred to as “excess return” or “abnormal rate of return,” which refers to the idea that markets are efficient, and so there is no way to systematically earn returns that exceed the broad market as a whole. Alpha is often used in conjunction with beta (the Greek letter β), which measures the broad market’s overall volatility or risk, known as systematic market risk.

Alpha is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager has managed to beat the market return over some period. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market’s movement as a whole.

The excess return of an investment relative to the return of a benchmark index is the investment’s alpha. Alpha may be positive or negative and is the result of active investing. Beta, on the other hand, can be earned through passive index investing.

Understanding Alpha

Alpha is one of five popular technical investment risk ratios. The others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-return profile of an investment.

Active portfolio managers seek to generate alpha in diversified portfolios, with diversification intended to eliminate unsystematic risk. Because alpha represents the performance of a portfolio relative to a benchmark, it is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return.

In other words, alpha is the return on an investment that is not a result of a general movement in the greater market. As such, an alpha of zero would indicate that the portfolio or fund is tracking perfectly with the benchmark index and that the manager has not added or lost any additional value compared to the broad market.

The concept of alpha became more popular with the advent of smart beta index funds tied to indexes like the Standard & Poor’s 500 index and the Wilshire 5000 Total Market Index. These funds attempt to enhance the performance of a portfolio that tracks a targeted subset of the market.

Despite the considerable desirability of alpha in a portfolio, many index benchmarks manage to beat asset managers the vast majority of the time. Due in part to a growing lack of faith in traditional financial advising brought about by this trend, more and more investors are switching to low-cost, passive online advisors (often called roboadvisors​) who exclusively or almost exclusively invest clients’ capital into index-tracking funds, the rationale being that if they cannot beat the market they may as well join it.

Moreover, because most “traditional” financial advisors charge a fee, when one manages a portfolio and nets an alpha of zero, it actually represents a slight net loss for the investor. For example, suppose that Jim, a financial advisor, charges 1% of a portfolio’s value for his services and that during a 12-month period Jim managed to produce an alpha of 0.75 for the portfolio of one of his clients, Frank. While Jim has indeed helped the performance of Frank’s portfolio, the fee that Jim charges is in excess of the alpha he has generated, so Frank’s portfolio has experienced a net loss. For investors, the example highlights the importance of considering fees in conjunction with performance returns and alpha.

The Efficient Market Hypothesis (EMH) postulates that market prices incorporate all available information at all times, and so securities are always properly priced (the market is efficient.) Therefore, according to the EMH, there is no way to systematically identify and take advantage of mispricings in the market because they do not exist.

If mispricings are identified, they are quickly arbitraged away and so persistent patterns of market anomalies that can be taken advantage of tend to be few and far between.

Empirical evidence comparing historical returns of active mutual funds relative to their passive benchmarks indicates that fewer than 10% of all active funds are able to earn a positive alpha over a 10-plus year time period, and this percentage falls once taxes and fees are taken into consideration. In other words, alpha is hard to come by, especially after taxes and fees.

Because beta risk can be isolated by diversifying and hedging various risks (which comes with various transaction costs), some have proposed that alpha does not really exist, but that it simply represents the compensation for taking some un-hedged risk that hadn’t been identified or was overlooked.

Seeking Investment Alpha

Alpha is commonly used to rank active mutual funds as well as all other types of investments. It is often represented as a single number (like +3.0 or -5.0), and this typically refers to a percentage measuring how the portfolio or fund performed compared to the referenced benchmark index (i.e., 3% better or 5% worse).

Deeper analysis of alpha may also include “Jensen’s alpha.” Jensen’s alpha takes into consideration the capital asset pricing model (CAPM) market theory and includes a risk-adjusted component in its calculation. Beta (or the beta coefficient) is used in the CAPM, which calculates the expected return of an asset based on its own particular beta and the expected market returns. Alpha and beta are used together by investment managers to calculate, compare, and analyze returns.

The entire investing universe offers a broad range of securities, investment products, and advisory options for investors to consider. Different market cycles also have an influence on the alpha of investments across different asset classes. This is why risk-return metrics are important to consider in conjunction with alpha.

Examples

This is illustrated in the following two historical examples for a fixed income ETF and an equity ETF:

The iShares Convertible Bond ETF (ICVT) is a fixed income investment with low risk. It tracks a customized index called the Bloomberg U.S. Convertible Cash Pay Bond > $250MM Index. The 3-year standard deviation was 18.94%, as of Feb. 28, 2022. The year-to-date return, as of Feb. 28, 2022, was -6.67%. The Bloomberg U.S. Convertible Cash Pay Bond > $250MM Index had a return of -13.17% over the same period. Therefore, the alpha for ICVT was -0 12% in comparison to the Bloomberg U.S. Aggregate Index and a 3-year standard deviation of 18.97%.

However, since the aggregate bond index is not the proper benchmark for ICVT (it should be the Bloomberg Convertible index), this alpha may not be as large as initially thought; and in fact, may be misattributed since convertible bonds have far riskier profiles than plain vanilla bonds.

The WisdomTree U.S. Quality Dividend Growth Fund (DGRW) is an equity investment with higher market risk that seeks to invest in dividend growth equities. Its holdings track a customized index called the WisdomTree U.S. Quality Dividend Growth Index. It had a three-year annualized standard deviation of 10.58%, higher than ICVT.

As of Feb. 28, 2022, DGRW annualized return was 18.1%, which was also higher than the S&P 500 at 16.4%, so it had an alpha of 1.7% in comparison to the S&P 500. But again, the S&P 500 may not be the correct benchmark for this ETF, since dividend-paying growth stocks are a very particular subset of the overall stock market, and may not even be inclusive of the 500 most valuable stocks in America.

Alpha Considerations

While alpha has been called the “holy grail” of investing, and as such, receives a lot of attention from investors and advisors alike, there are a couple of important considerations that one should take into account when using alpha.

1. A basic calculation of alpha subtracts the total return of an investment from a comparable benchmark in its asset category. This alpha calculation is primarily only used against a comparable asset category benchmark, as noted in the examples above. Therefore, it does not measure the outperformance of an equity ETF versus a fixed income benchmark. This alpha is also best used when comparing the performance of similar asset investments. Thus, the alpha of the equity ETF, DGRW, is not relatively comparable to the alpha of the fixed income ETF, ICVT.
2. Some references to alpha may refer to a more advanced technique. Jensen’s alpha takes into consideration CAPM theory and risk-adjusted measures by utilizing the risk-free rate and beta.

When using a generated alpha calculation it is important to understand the calculations involved. Alpha can be calculated using various different index benchmarks within an asset class. In some cases, there might not be a suitable pre-existing index, in which case advisors may use algorithms and other models to simulate an index for comparative alpha calculation purposes.

Alpha can also refer to the abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like CAPM. In this instance, a CAPM model might aim to estimate returns for investors at various points along an efficient frontier. The CAPM analysis might estimate that a portfolio should earn 10% based on the portfolio’s risk profile. If the portfolio actually earns 15%, the portfolio’s alpha would be 5.0, or +5% over what was predicted in the CAPM model.