$10 billion is what we’ll lose in penalties if the Employer Mandate provision of the Affordable Care Act (ACA) is delayed a year according the Congressional Budget Office (CBO). But that 
wasn’t the only provision in the law that was recently delayed. According to the announcement, state health exchanges will not be required to verify the information given by applicants for government subsidies and tax credits. Incredibly, billions of dollars will be doled out on the honor system. There’s no official estimation of what that’s going to cost.
Under the penalties of the ACA, people must have health insurance by the year 2014. People who do not receive health care benefits through employers or government programs can purchase health insurance by any means. However, the insurance exchanges now being set up in each state is the only way to apply for government subsidized health insurance. A family of 4 making as much as $96,200 and individuals with $45,960 in annual salaries can qualify for tax credits on health insurance purchased through the exchanges. Lower income levels can apply for federal subsidies to reduce their costs. Amounts will differ from state to state but the CBO estimates the average health insurance subsidy is worth $5,290.
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ACA officials have admitted that the information systems and databases needed to cross-check the information consumers must give to qualify for government assistance aren’t complete or secure. Instead of delaying the exchange start-ups, government tax credits and subsidies will be awarded on schedule without the necessary verification. Since the passage of the law, countless deadlines have been delayed. The decision to go ahead and keep to the original schedule in this instance is irresponsible.
Moral hazards occur when one party makes it very tempting for people to make choices that benefit themselves but at a cost to others, in this case, the tax payers. Even with all the necessary validations in place, fraud will be rampant on the state health insurance exchanges because of the way the law was written. Waiving the necessity of fact-checking makes it even more so.
For example, a simple dollar in stated income can make the difference between getting financial assistance or not. Kaiser Family Foundation offers a simple tool to broadly estimate subsidies given number of family members, family income, and location. Enter $94,200 and specify a family of two adults and two children to receive a subsidy worth $920 off the cost of health insurance sold on the exchange. Enter $94,201 and get $0.
A few thousand dollars can make a huge difference. One study found instances where entering $30,000 instead of $32,000 as income would result in a $3,200 difference in health insurance benefits. There are many angles that, with a little deceit and no validation, can be used to gain benefits with little risk of repercussions.
The health insurance offered on the exchanges in most states will be very expensive unless one qualifies for tax credits and/or subsidies; and lower household incomes will bring the most government assistance. When small discrepancies between fact and fiction can mean the difference between affordable and not so affordable health insurance, deception will be very tempting
Until 2015, there will be no employer information available for validation purposes. People unhappy with their company’s health insurance can deny they receive any or claim it’s unaffordable at their income level and apply at an exchange for insurance and financial assistance. Health insurance sold on the exchange will also be more comprehensive than most employer offerings; and those in need of extra coverage will be tempted to stretch the truth in order to get it.
There are others who will actually increase their income a couple of dollars to avoid falling into Medicaid coverage and, instead, apply for generous government financial assistance to purchase health insurance on the exchanges. This very real issue was the subject of a recent Orange County Register Ask Emily health care column. A mom with a family of six, desperate for an alternative to her current Medicaid coverage, was hoping for a way out through the exchange. She was told, however, that only individuals and families with incomes above 138% of the Federal Poverty Level are eligible for government financial assistance and health insurance on the exchanges. Incomes at or below 138% FPL come under Medicaid coverage. Entering a larger income on her exchange application would solve her problem.
An ACA official claims the Internal Revenue Service (IRS) can sort out any discrepancies at a later time. Really? What about the millions who don’t file taxes? – There’s no record of their income. On top of that, there’s no federal database for household income, the basis for determining federal assistance on the exchanges. Furthermore, small discrepancies are routinely given a pass by the IRS. That ACA official is whistling in the dark.
Then there’s the fact that people, many with minimal training, are being hired to help consumers apply for health insurance and government financial assistance on the exchanges. Because of the anticipated technical problems with the exchanges, many states will be dependent on people like these to get the enrollment numbers they need to make health insurance offerings possible. Significantly, incentive bonuses are being paid to these people for each person they enroll. It won’t take long to determine what data thresholds are needed to secure federal payouts and ensure high enrollment numbers.
There are people who believe that, despite the absence of fact-checking on exchange applications, fraud will be minimal. I’d like to tell them to take a look at Earned Income Tax Credits (EITC) , another federal benefit. Today, 21 – 25% of those tax credits go to people who really aren’t eligible according to the Treasury Inspector General. Supposedly, the information entered by those applicants is checked. That same error rate for the projected number of people applying for benefits on the insurance exchanges would cost $250 billion in its first decade. Is this the kind of health reform we were hoping for?