1 Million Americans Likely Receiving Incorrect Federal Healthcare Subsidies

Hundreds of thousands could face massive tax bills and possible fines in 2015

4 min read
1 Million Americans Likely Receiving Incorrect Federal Healthcare Subsidies
Photo: Richard Rudisill/Getty Images

IT Hiccups of the Week

Last week saw an increase in the number and types of IT-related malfunctions, ooftas, and errors reported over the previous week. The most interesting IT Hiccups-related story of the lot was one from the Washington Post indicating that 3 million of the 8 million or so individuals enrolled for health insurance under the Affordable Care Act have a variety of “discrepancies” in their applications, including 1.1 million to 1.5 million applications with levels of income individuals are claiming that differ “significantly” with Internal Revenue Service (IRS) documents.

As a result, the Post estimates, the Obama Administration may be making improper subsidies payments for more than 1 million Americans to help pay for their health insurance plans, including hundreds of thousands likely receiving higher subsidy amounts than they are entitled. Furthermore, because of computer-related issues, it may be well into late summer before the situation can be rectified. As of today, the Administration has not lowered (or increased) anyone’s subsidy amount because of these discrepancies, the Post reports.  A person who is currently receiving too high a subsidy will be required to pay it back to the IRS by April 2015, however. Given that those receiving subsidies require low incomes in the first place, a person who is innocently getting too high a subsidy may be facing a massive, and potentially bankrupting, tax bill next year.

And for those found to be lying on their applications in an attempt to receive a higher subsidy than they deserve, not only are they going to get a nasty payment demand from the IRS,  but they also face a $250 000 civil fine. Even an “honest error” on an insurance enrollment application can result in a civil fine of $25 000, although I doubt that will ever be imposed, because it would be a surefire way to discourage lots of subsidy eligible individuals from signing up for health insurance.

Paying out health insurance subsidies (or even approving health insurance) without first fully verifying income (and other application information) was never supposed to happen. According to the original plan, the “back-end” office IT systems linking the different government agencies and departments such as the IRS, Department of Homeland Security, the Social Security Administration, the Veteran’s Administration,  and so on were to be in place by 1 October so that the income, immigration status, citizenship, age, other health insurances received, etc. could be verified almost immediately upon receipt of a person’s health insurance enrollment application.

However, because of all the troubles trying to get the ACA website itself working by 1 October and afterwards, the Administration decided early on to defer the back-end office systems development.  Henry Chao, deputy chief information officer at the Centers for Medicare and Medicaid Services testified in front of the US Congress last November that 30 to 40 percent of the back-end systems work still needed to be completed. While everyone knew the systems were behind schedule, to say that Chao's admission took Congress by surprise is an understatement.

Kathleen Sebelius, the Health and Human Services Secretary at the time, promised a startled Congress that the back-end systems would be in place by mid-January, so not to worry. That timetable, however, soon slipped to mid-March, and now, as the Post reports, to late summer. Some $121 million has been budgeted since the beginning of the year to try to get these back-end systems working, which comes on top of the unknown tens of millions of dollars previously spent on their development.

Interestingly, when the systems' development timetable slipped from mid-January to mid-March, the Administration admitted that if the back-end systems were not completed by the March date,  “the entire healthcare reform program [could] be jeopardized” because the “issuance of [incorrect] payments to health plans ... could seriously put them at financial risk; potentially leading to their default and disrupting continued services and coverage to consumers.”

Another reason why the lack of back-end systems could place ACA in jeopardy is that without them, the Federal government cannot accurately determine how many people have even paid their health insurance premiums. The lack of valid premium payment data along with improper subsidy payments could lead to wrongly predicting the “Risk Adjustment, Reinsurance, and Risk Corridor [pdf], potentially putting the entire health insurance industry at risk," Administration documents stated.

The Obama Administration naturally is trying to play down its own dire warnings about paying out subsidies without first verifying a person’s eligibility or knowing who has and hasn’t paid their premiums, which has angered many Republicans in Congress, some of whom who are calling for a suspension of unverified subsidy payments. The Administration is unlikely to do that, but if it can’t get those back-end systems up and running in the next few months, there will likely be an increasingly large political—not to mention huge financial—cost to be paid.

Speaking of cost, a story by Politico reports that $475 million has been spent so far on the failed Oregon, Massachusetts, Maryland, and Nevada health insurance exchanges alone. Both Maryland and Massachusetts, however, now want even more money to fix their broken exchanges, while the FBI is trying to determine whether there was fraud involving the Oregon exchange effort. Nevada announced last week that it has decided to throw in the towel on its own exchange, and will use the Federal one instead, at least for 2015. Rumor has it that Rhode Island, which has a working exchange, may soon decide to move to the Federal exchange as well. In Rhode Island’s case, the future costs of operating and maintaining its exchange is starting to look increasingly unaffordable.

The Politico story also says that according to the Kaiser Foundation’s calculation, the Federal government has given state governments some $4.698 billion since 2011 to support their exchange development efforts.  In addition, according to recently released figures, the Federal government has so far obligated some $834 million to create its exchange and back end support systems, and will need another $200 million in Fiscal Year 2015 to maintain it, which is about double what was thought to be required to develop the exchange in the first place.

Finally, last week the real story of the first day ACA enrollments came to light thanks to a Freedom of Information Act lawsuit by Judicial Watch. Whereas it was long thought that only 6 people were able to enroll that first day, in reality, only one person was ever able to enroll for health insurance coverage, even though 43 208 accounts were created, government records show.

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