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 is the advanced subsidies that go to insurers on behalf of individuals to reduce what they owe for plans purchased on an ACA exchange.
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 on our findings.
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. 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.
