Will Obamacare Delays Encourage Health Exchange Cheating?

The latest flap over the implementation of the Affordable Care Act involves the ability of the IRS to verify the income people use to calculate their health exchange subsidy.  While critics of Obamacare warn darkly that this will cause massive cheating, it appears that there is much less to the matter of delayed income verification than some wish to believe.

With health exchanges due to open for business in just three months, the Obama Administration still needs to do an awful lot to make enrollment seamless. But widespread fraud? I don’t think so.

Here is the story: Earlier this month, the Obama Administration quietly acknowledged that a massive and complex government data hub aimed at verifying information about insurance buyers will not be ready by the time people begin purchasing on the exchanges in October. As a result, the IRS will be unable to immediately verify that a buyer is receiving the correct income-based subsidy and, in effect, will have to take the purchaser’s word for it.

The system was never going to be great. Even as designed, the income data for somebody buying in October, 2013 for coverage in 2014 would come from tax year 2012. Now, things will be even clunkier.

This has created two concerns: Some people will low-ball their income in order to get bigger subsidies. And some low-income people who live in red states will overstate their income so they can be eligible to buy on the exchanges. They are currently caught between their states refusal to participate in the law’s expansion of Medicaid and the ACA’s prohibition against those below a certain income buying on the exchange (since the law assumed they’d be eligible for expended Medicaid).

Critics acknowledge the IRS will be able to catch up with many who misstate income when it reviews their tax returns after the hub is up and running. But what of those who don’t file returns, ask some critics of the ACA? Won’t they be able to game the system?

Well, probably not.

Avik Roy, in a blog notable for the remarkably irresponsible headline “Not Qualified for Obamacare’s Subsidy? Just Lie…,”sees the whole episode as a deliberate Obama plot to encourage “tens of billions of dollars of waste, fraud, and abuse in order to accomplish a political objective.”

More serious observers, such as health expert Bob Laszewski, also worry about verification of incomes of these nonfilers.

Will it be a real problem? Let’s look at what we know about those who don’t file income tax returns.   

There are probably 20 million non-filers this year—about 16 million singles and 4 million married couples. For context, more than 150 million households filed returns in 2013.

Non-filers make very little money. The general rule is a single person must file if she makes about $10,000-a-year (the threshold differs a bit depending which side of 65 she is on). They also must file if they owe payroll tax on tips or had as little as $400 in self-employment earnings. Dependents must file if their earned income is just $5,800 or their unearned income only $950.

But many who make less than these thresholds file returns anyway so they can benefit from the Earned Income Credit and the Child Tax Credit, or from education credits. Many low-wage workers also voluntarily file so they can get refunds.

A recent Urban Institute study estimated that 86 percent of all uninsured file tax returns.

We also know that relatively few cycle in and out of the tax system. One study finds that on average about 8 percent of filers in a given year don’t file the next, but much of that may be due to death and changes in marital status.

This paints a picture of two main groups of non-filers: The elderly (mostly widows)who live on very little income, and adults younger than 65 who because of disability or other issues are almost entirely disconnected from the workforce. 

The health exchange subsidies are largely irrelevant to both. Those over 65 get Medicare. Many of those under 65 were almost certainly eligible for Medicaid under pre-ACA rules (and possibly Medicare as well) and will still be eligible for Medicaid under the new law.

Finally, Mr. Roy’s encouragement aside, there is little reason to expect people will lie to get a better deal. Our income tax is largely based on the same sort of honor system the ACA will use in 2014. And compliance is relatively high. There is no reason to believe it will be much different when it comes to insurance.

Besides, the penalties for lying are quite stiff. The government will continue to have other ways to verify income of applicants. And, if you get a subsidy, you must file a tax return the following year.

Will people make mistakes? Almost certainly. Will the delayed data hub cause massive fraud and abuse? Almost certainly not.