April may or may not be the cruelest month, but this year April was particularly cruel for Affordable Care Act subsidy recipients. A recent H&R Block analysis says that 61 percent of tax filers will have to repay part of the premium subsidies they received to buy health insurance on the law’s exchanges.
The average repayment amount was $729, or about a third of the average refund of $2,195 that taxpayers received. The likely result of this April surprise is that fewer people will sign up for health insurance and the remaining purchasers will pay higher premiums.
The Affordable Care Act guarantees that anyone who wants to buy insurance can (guaranteed issue) and that everyone will pay roughly the same premium, adjusted for age, regardless of their health (community rating). Normally this would be a recipe for disaster since people will delay buying insurance until they become sick and need health care. The law gets around this through the individual mandate that requires everyone to have health insurance coverage or pay a penalty.
Opponents of the law have long argued that the individual mandate will not work because the penalties for not purchasing insurance are so low compared to insurance premiums that many people would forego insurance and risk the penalty. Since the penalties rise with income, the disparity between the fixed premiums and the penalties, and the resulting incentive to forego insurance, will be greatest for poorer people.
Obamacare mitigates this problem by providing subsidies to anyone earning 100-400 percent of the federal poverty level – between $24,000 and $96,000 for a family of four – to purchase health insurance on an insurance exchange. (Whether subsidies are available on the federally run exchanges being used in 36 states will soon be decided in the Supreme Court case King v. Burwell.) The subsidies are highest for the poorest enrollees and decrease up to the limit.
The availability of subsidies has successfully attracted poorer people onto the exchanges; more than 7.5 million people have signed up on exchanges and 87 percent of enrollees are receiving subsidies. The problem is that exchange enrollees received subsidies based on the income they expected to earn in the coming year. But income can fluctuate over the course of a year; hourly workers increase the number of hours they work, salaries or bonuses increase, people change jobs, additional family members obtain employment and family size changes. Now that they have filed returns, subsidy recipients have to reconcile their apparently not very accurate projections with their actual incomes.
The possibility that large numbers of people would underestimate their incomes and find themselves liable for subsidy repayments has been known since the Affordable care Act was enacted. A Kaiser Family Foundation publication warned about the problem four years ago. But neither Obamacare advocates nor the IRS did much to publicize it.
Many subsidy recipients are now expressing surprise. If their incomes rose substantially they could be liable for thousands of dollars of repayment. Undoubtedly, they will think twice about enrolling again. As the Kaiser Family Foundation observed, “The effect of the reconciliation process may be to suppress participation in the Exchanges and limit the number of people obtaining coverage.”
This effect will be greatest among healthier patients who do not currently need medical care. Their exit from the market will make the remaining health insurance pool sicker, resulting in higher, less affordable premiums for everyone. If this effect is large enough it will drive additional people out of the market as the disparity between rising premiums and penalties increases.
From the start, a complex design, poor execution and lack of communication have dogged the Affordable Care Act. Now a predictable but poorly publicized problem has added to its woes. Substituting a fixed, refundable tax credit that is age adjusted but unrelated to income for the current system that requires exchange enrollees to guess their future income would go a long way toward simplifying administration and making the true cost of insurance predictable and transparent to the American people. Extending the credit to everyone buying individual health insurance, both on and off the exchanges, would increase choice, make insurance affordable for more people, and eliminate the disparate tax treatment between employer provided and individually purchased insurance.
Buying health insurance and paying taxes are two unpleasant aspects of modern life – the least we can do is make them surprise free.
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