The Great Obamacare Enrollment Fraud

A new Paragon report finds Affordable Care Act subsidies are being exploited so that health insurers and brokers enjoy more income while hard-working Americans pay for it. The root of this problem, as I and coauthor Drew Gonshorowski identify, is the advanced subsidies that go to insurers on behalf of individuals to reduce what they owe for plans purchased on an ACA exchange.

As I will discuss below, there are large incentives for enrollees—as well as the brokers or agents who assist them in their application and the health insurers who receive payment of the subsidy—to misestimate income to claim more subsidy than the legal amount to which they are entitled. This problem has been significantly exacerbated by legislation signed by President Biden which made health insurance plans “free,” or fully taxpayer-subsidized, for enrollees claiming income between 100 and 150 percent of the federal poverty level (FPL). In our analysis, we estimate there are about 5 million people enrolled in this income category illegitimately and that the cost to taxpayers will likely be $20 billion or more in 2024. Corresponding with the release of the report, The Wall Street Journal published an op-ed from me on our findings.

What’s unique about 100 to 150 percent FPL?

President Biden signed legislation—the American Rescue Plan Act and the Inflation Reduction Act—that significantly increased ACA premium subsidies for health insurance companies. The expanded subsidies are in place through 2025. Enrollees who report income between 100 and 150 percent of the FPL now qualify for a fully subsidized plan. Moreover, enrollees who report income in this range also qualify for a cost-sharing reduction program that raises plan actuarial value to 94 percent, meaning the plan has minimal deductibles and cost-sharing requirements.

What are our top-line findings?

• Nearly half of exchange sign-ups during the 2024 open enrollment period—and more than half of sign-ups in states with HealthCare.gov—reported income between 100 and 150 percent FPL, qualifying for fully-subsidized, 94 percent actuarial value plans.
• The percentage of people signing up who report income in this range has increased substantially since the enhanced subsidies took effect.
• We estimate roughly 5 million people are receiving fully subsidized plans who do not meet legal qualifications for them.
• We estimate this improper spending to be $20 billion in 2024 (in the paper, we provide back-of-envelope estimates between $15 billion and $26 billion).

How does the process work and what are the financial implications of misestimating income?

• The Treasury pays insurance companies on behalf of individuals who enroll in ACA exchange plans. The payment amount is determined based on what people estimate their income for the year will be. So, in the fall of 2023, people sign up for coverage and the subsidy is based on what people estimate their income in 2024 will be.
• There is a reconciliation process when the person files their taxes, in which the advanced subsidy is brought in line with what the person reports as income. For the above person, this would happen when they file their 2024 tax return, so typically in the spring of 2025.
• If the Treasury sent too much subsidy to the insurer, then the person (not the insurer) is responsible for returning the excess payment to the Internal Revenue Service (IRS).
• BUT…there are limits on how much the IRS can recoup. These limits mean that people with income above 200 percent of the FPL benefit from underestimating income to between 100-150 percent FPL when they enroll. They benefit from excess premium subsidies as well as the benefit of being covered in a plan with 94 percent actuarial value for the year.
• BIGGER BUT…for people in non-Medicaid expansion states who claim income between 100-150 percent FPL but end up with income below 100 percent FPL, there is no recoupment. The figure below (this week’s Paragon Pic), which is taken from the paper, shows the costs incurred for people who misestimate their income to receive large subsidies that do not need to be repaid. The costs are largest for older enrollees who earn below 100 percent FPL since the premiums are larger for them and the subsidy covers the entire premium.

The problem is most severe in non-expansion states and HealthCare.gov states

• In nine states (Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Texas, and Utah), the number of sign-ups reporting income between 100 and 150 percent FPL exceed the number of potential enrollees.
• The problem is particularly acute in Florida, where we estimate there are four times as many enrollees reporting income in that range as meet legal requirements.
• In states that use HealthCare.gov, 8.7 million sign-ups reported enrollment between 100 and 150 percent FPL compared to only 5.1 million people likely eligible for such coverage, or 1.7 sign-ups for every eligible person.
• Controlling for Medicaid expansion demonstrates the problems with HealthCare.gov as the percent of people who report income between 100 and 150 percent of FPL as those who are potentially eligible is more than twice as high in states using HealthCare.gov as using a state-based exchange.
• The evidence suggests that part of the issue is that state-based exchanges have done a more thorough job of re-evaluating people for exchange coverage who were no longer eligible for Medicaid after the public health emergency unwinding than states that use HealthCare.gov.

Big Benefit for Unscrupulous Brokers and Insurers

• First, some of the problems are certainly innocent mistakes or projection errors—people uncertain about what their income will be—and then earning less or more income than they projected.
• But the scale of the issue is so large—with concentrated areas like in states that use HealthCare.gov—that there are clearly deeper problems.
• In the paper we highlight other problems associated with fully subsidized plans, such as brokers switching people from one plan to another without the enrollees’ consent to maximize their commissions.
• Unscrupulous brokers are certainly contributing to fraudulent enrollment and the enhanced direct enrollment feature of HealthCare.gov appears to be a problem. Brokers just need a person’s name, date of birth, and address to enroll them in coverage.
• Health insurers are a primary beneficiary of the surge in improper enrollment from people misestimating income. The larger subsidies mean that consumers are less sensitive to prices of plans and are more likely to enroll, and it’s much easier for insurers to collect subsidies from the U.S. Treasury than customers.

Six Steps to Fix the Problem

• Congress should permit the enhanced subsidies to expire after 2025.
• Congress should raise subsidy recapture limits to reduce incentives for income misestimation.
• Congress or the next administration should limit automatic re-enrollment into exchange plans and end it for people moving from or into fully taxpayer subsidized plans.
• Congress should appropriate cost-sharing reduction payments and prohibit silver-loading.
• Congress should conduct aggressive oversight of the Biden administration’s management of HealthCare.gov, enhanced direct enrollment, and insurer and broker actions.
• Congress or the next administration should reverse policies of the Biden administration that enabled such widespread fraudulent enrollment, particularly the continuous open-enrollment period for people who report they have income below 150 percent FPL.

All the best,

Brian Blase
President
Paragon Health Institute