Affordable Care Act: challenging the definition of insurance

This article reports that for one tax preparer, H&R Block, half of the individuals receiving Affordable Care Act (ACA) subsidies need to pay back some of the subsidies usually by deducting from the income tax return resulting in an average of a “17 percent drop in the average return so far this spring”.   Although these tax payers may need to pay back the excess benefit even if it exceeds their income tax refunds, most will see this a smaller income tax refund than they would normally expect.

In the case of the personal responsibility payment (fine or tax for not being covered by ACA eligible plan for at least 10 months), the IRS can only collect this payment from deduction from a income tax refund.   I’m not sure about the reimbursement of over-paid subsidies, but certainly it is much harder to collect the over-payment if it exceeds what the tax payer will get in a refund.

This trend is for the early part of the tax filing season.   Many people who received subsidies for ACA plans bought on exchanges need to wait before filing because of errors in the initial distribution of tax forms from the federal exchanges:

The federal government sent incorrect tax information to about 800,000 people who purchased health insurance last year through HealthCare.gov and asked them to delay filing their returns, Obama administration officials said Friday.

The mistake, which affects a critical part of the president’s signature health-care law, could slow tax refunds for many Americans who depend on the money for their family’s ­finances.

Since it is not clear how people can learn they have errors, I expect most people receiving premium subsidies will delay their tax filings until later.

Eligibility for premium subsidies is based on annual income and this can only be known accurately at the end of year.  However, the premiums must be paid during the year before the annual income is fully known.  One way to implement subsidies would be to require everyone pay full premiums during the year and then receive the subsidies in the form of a larger income tax refund at the end of the year.    I understand that this is an option during enrollment.

The problem with this approach is that the unsubsidized premiums are unaffordable for many people.   To provide a more affordable premium, a second option allows for receiving the subsidies to discount the monthly premiums based on estimated annual income.    For many people, this estimate may be wrong and some will receive too much in subsidies and thus owe money back to the government at the end of the year.   The error can also work in the other direction in so that some will receive additional refund for not receiving the full subsidy their annual income entitled to them.   The H&R Block information suggests there more who have receive too much subsidies than those who received too few.   In addition, the excess subsidies is very significant in terms of reducing the annual income tax refund.

Many people plan on income tax refunds as part of their annual budget.   However, the money is not paid to them until they file their taxes.  As a result there is some uncertainty as to how much return they will get.  Although getting a smaller refund does not have the same impact on a budget as having to write a check to pay the difference, I think most people will feel that they are paying for something even though it represents a smaller refund.

People paying back the ineligible portion of the subsidy are buying insurance premiums for months that are now in the past.  In many cases, they had no health problems requiring insurance during those months.   This contradicts the notion of insurance where premiums are paid in advance of the period of risk.   Future uncertainty justifies this advance payment of a premium.   Once the coverage period lapses, the uncertainty is gone.   There is no justification for paying an insurance premium for a certainty that there would be no need for insurance.   Yet, this is what the government is demanding from people at tax filing time.

In repaying excess subsidies, they must pay for past insurance that in many cases they now know they didn’t need.  This current time payment is not for insurance.  Also, the payment is going straight to the government as compensation for the government’s prior financing of the insurance premiums (when it was truly insurance against uncertainty).   Now that the uncertainty is gone, this represents to an individual tax-payer a new tax or an unexpected fine, not an insurance premium.  The taxpayer will feel this is a penalty of some kind.

The reason we allowed advanced payment of premium subsidies based on estimated income is because the undiscounted premiums would be unaffordable to most people.   The people agreed to accept an insurance plan because the discounted premium payment matched their expectation of risk for need for care.   They may not have agreed to a higher premium because they may feel the risk for needing care is not high enough to justify the additional cost.   They may reason that they had better options to use that extra money than to insure against an unlikely need.

People compared plans and made their choices based on the discounted prices of the premiums.   These subsidized premiums represented real out-of-pocket monthly expenses that they felt were affordable for insurance against uncertain health care needs.    As the year progressed and they made their payments, they reasonably assumed they were paying the right price for insurance.    At the end of the year, they will feel they have received the value of the insurance in the protection of uncertainty at the time.

That uncertainty is gone at the time of filing for a tax.   For many people, it is at this time of certainty of health-care needs for prior year that they now must confront a higher cost of the premiums they had been enjoying.    It is nonsensical to claim that they must now pay premiums for past insurance.  The present payments are not buying insurance because there is no longer anything to insure against.    As far as the individual is concerned, he has already paid the fair price of the insurance.   The repayment cost is instead a tax penalty (or a fine) that requires a different justification than paying for insurance.

The justification for paying back unqualified subsidies is a fine for failing to predict the future.   The insured failed to accurately predict his annual income accurately to get the right subsidies.   The point of insurance is to protect against unexpected losses because people can not predict the future.   The prepayment of subsidies of insurance premiums introduces a new risk of unexpected losses due to failure to predict income.   For healthy people who may not otherwise buy health insurance, their acceptance the discounted price of the premiums  exposed them to the risk of tax-time penalties for incorrectly estimating income.

There are two ways that a person can make an error in estimating annual income in a way that will lead to qualifying for lower subsidies.   The commonly thought way is that they earned more than expected.   This may be from a raise, a job change, or a bonus.   While the same perception of the payback being a fine exists, the cost is coming from this from this unexpected increase in income.   Also, in most cases the subsidy qualification gradually declines with increased income so for most people this will not be a major fine.

The other means is that a person fails to make the minimum qualifying income.   At the threshold of minimum qualifying income, the subsidies are the highest.   If a person making this estimate fails to make this money, then he is responsible for paying the full premium price without subsidies.   This can be devastating.   Most likely the person would not have paid the premium in the first place because it would be unaffordable, but now he has to pay the entire year of full premium at tax time.   Certainly this will wipe out any tax refund coming from him.   I suspect he will now be indebted to the IRS to pay this back with interest into the future.    Also, now that the year is over, he can not switch over to a Medicaid plan (if he were eligible).    He enjoyed the protection of a non-Medicaid plan during the year even if he had no need for healthcare for the year.    The problem is probably even worse if he did have need for healthcare because of the lower Medicaid reimbursement rates and and more restrictive network of providers.

The application of estimated-income subsidies to monthly premiums can be devastating at the lower incomes at the edge of eligibility for subsidies.   I have not yet heard of any stories of people who fell into the category where they failed to make enough to qualify.   Maybe that is because of some safety-net feature that excuses them from paying this debt.   Without such a safety-net, the tax-time repayment of overpaid subsidies can financially ruin these people at the lower income levels.    That ruin will be permanent because they may never be able to pay back that debt.   In many cases, this new debt will be for a inverted insurance of no-longer uncertain risks.

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4 thoughts on “Affordable Care Act: challenging the definition of insurance

  1. Subsidizing premium payments to reduce monthly premium costs results in a regressive tax at tax filing time when the excess subsidies must be repaid. This repayment no longer represents an insurance premium because now it is certain whether there was a need for insurance. This repayment is a tax. This tax hits harder at lower incomes because this group is much more likely to incorrectly estimate their annual incomes. Hourly or contract workers do not know how much they can make until the year ends. Also, the higher subsidies at the lower incomes puts more money at risk of needing repayment at tax-filing time. The result is a very regressive tax that can discourage continued participation in health insurance exchanges by the low-income groups that the exchanges are designed to be benefit the most.

  2. This is right, the basic premise of giving a tax credit to assist for the payment of the premiums is great. It’s after the IRS gets all of it’s insane calculations into this law that it goes haywire and usually results in a pay back scenario.. All of which was not adequately addressed by Healthcare.gov upon signup, all of the tax filings revert back to a Federal Poverty Level test to your wages, which skews the whole premise of what Heatlhcare.gov and the Affordable Care Act tried to do.

    How could someone in poverty possibly afford a ‘Silver’ plan that is offered, simple answer is they can’t – but a middle to lower middle class person could afford to pay his half but then after the government paid the other half, it’s determined that you’re not of ‘poverty’ means so they want to credit back…

    It doesn’t compute at all and is terrible. How could it be possible that over half of the signups have to pay these benefits back, that isn’t help, it’s a scam…

    • It was poorly thought out. The subsidy payback looks like a tax, acts like a tax, and is enforced like a tax. It happens to be a tax that only applies to the lower incomes and hits the lowest incomes the hardest.

      Low incomes are also unpredictable incomes and with large variance year-to-year. These are the ones who will get hurt the most. 2014 turned out to be a good year and many made more (had more hours on job, if nothing else) than before. It could have just as easily have been a bad year sending their annual wage below the federal poverty level making them ineligible for any subsidy after they have already completed a year of coverage for a silver plan. They may be on the hook to payback an amount equal to 50% or more of their annual income for that year. If in addition, they did not have a major health problem (resulting in benefits) this will be equivalent to a huge tax for having a low income.

  3. This article recognizes the problem of the subsidy uncertainty as discouraging enrollment:

    Tax experts say the problem will persist because the subsidy system is still based on consumers’ own—and often inaccurate—income projections. Many of the people enrolled for coverage in 2015 include customers who were automatically renewed by the federal government, which means their subsidies could be inaccurate if they didn’t update their income.

    This can lead to more problems in the future for those who are participating as noted in next paragraph:

    “These flawed income projections can just perpetuate because so many people were auto-renewed. That concerns me from a policy standpoint,” said Tara Straw, a health-policy analyst at the Center on Budget and Policy Priorities, which trained people who assisted consumers with tax issues under the health law. “If it was wrong for 2014, it will be wrong for 2015.”

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