CongressDaily has an interesting article this morning on a significant source of over-spending in the health care law – excessive health insurance subsidies provided to individuals and families. The issue arises from the fact that the new insurance subsidies are based on an individual’s (or family’s) most recent tax return – so that subsidy levels beginning in January 2014 will be based on reported income for 2012. As might be expected, a family’s circumstances can change significantly during this time lag for a variety of reasons – a change in job, significant raise, divorce, birth, or death, to name just a few.
The health care law established a reconciliation process intended to recapture any subsidy over-payments – but the law capped the amount of such repayments at $250 for individuals and $400 for families. As the article reports, raising these limits to $1,000 for an individual and $2,000 for a family would result in an additional $27 billion in repaid subsidies. This $27 billion in subsidy overpayments represents a significant portion of the $464 billion total devoted to insurance subsidies in the new health law. But the figure does NOT represent the full level of overpayments – it excludes the revenue repaid under the law’s existing provisions (capped at $250 per individual and $400 per family), and it does not include any additional revenue that might be repaid if the repayment cap were lifted entirely, rather than merely raised to $1,000 per individual and $2,000 per family.
Tinkering With Health Credits Eyed As Way To Cut Costs
Wednesday, June 30, 2010
by Peter Cohn
An area of health reform that has received little attention is getting a new look as deficits mount: what happens when someone receives larger health insurance subsidies than they are eligible for because they made too much money.
Under the law, low-income individuals and families can get tax credits to help pay insurance premiums beginning in 2014, when new exchanges come online. The credits are based on income, marital status and number of children — up to 400 percent of the poverty line, when the out-of-pocket expense is capped at 9.5 percent of adjusted gross income and the government picks up the rest.
According to CBO, the credits will cost $464 billion through 2019, the largest expense in the health law. And that’s just in the first six years, meaning the cost should grow considerably beyond 2020.
The kicker is eligibility is based on a household’s most recent tax return. With enrollment beginning in October 2013, eligibility would be determined by 2012 reported income. In January 2014 when the credits take effect, an individual or family could have had much-changed economic circumstances in the intervening years.
It can work both ways: A household could earn significantly less and be eligible for bigger credits due to job loss, divorce, retirement, or a newborn child, for instance. In such cases they can reapply for larger credits, which are awarded monthly. If a household is earning more money, they still get to keep much of their credits received during the year.
There is an IRS “true up” process where the credits are reconciled with actual income, and taxpayers are required to pay back up to $400 in excess credits, or $250 for individuals, which can be a fraction of the overpayments. If income turns out to be above 400 percent of poverty — $88,200 for a family of four based on 2009 guidelines — it can get very expensive. They would have to pay back the entire amount received during the year.
One proposal floating on Capitol Hill would increase the payback requirement from $400 to $2,000 for households and $250 to $1,000 for individuals. The Joint Committee on Taxation scored that idea as raising $27 billion over 10 years, which would barely make a dent in the overall cost but could provide deficit-conscious critics of the law an opening.
Take a family of four earning $44,100, which is 200 percent of the poverty line based on 2009 guidelines. They would have to pay 6.3 percent of income toward health coverage, which under a hypothetical $13,000 insurance plan would total $2,778. The government pays the remaining $10,222 in tax credits, freeing up that money for the family.
Then comes tax season the following April, and due to new income, it turns out the family actually made $55,125. That is up sharply from two years prior, putting that household now at 250 percent of poverty — meaning they should have contributed 8.05 percent, or $4,438, and received tax credits worth $8,562.
That’s a $1,660 difference between credits received and what they were eligible for, of which the family would have to pay back $400 — essentially a $1,260 freebie. Under the alternative scored by JCT, whose authors requested anonymity because the proposal was unofficial, they would have to pay back the full $1,660.
Urban Institute fellow Eugene Steuerle argued the program will likely be error-prone and difficult to administer. “It’s extraordinarily hard to collect from people at the end of the year. That’s why we try to have a tax system that withholds accurately, or over-withholds,” said Steuerle, a Treasury tax official in the George H.W. Bush administration. “They’re really not just creating a new health system; they’re creating an entirely new tax system and an entirely new welfare system.”
He said extra tax liability of up to $2,000 wouldn’t be easy to pay for a family of four earning shy of $90,000.
A Senate Democratic aide said repayments were limited to $400 to ease the burden on poor families, as those earning more than 400 percent of poverty can more easily pay it back. It was also designed that way to avoid similar flaws with Earned Income Tax Credits taken in advance during the year, which many low-income families have turned down for fear their income will end up too large and they would have to pay it back.
Judith Solomon, co-director of health policy at the Center on Budget and Policy Priorities, said increasing the repayment caps could prove a deterrent to getting health coverage through the exchanges.
“For some people, knowing they’re going to have this tax liability, it’s likely they’re going to come in in the middle of the year and say ‘I don’t want a credit anymore,’ ” Solomon said. She added the $400 penalties were probably enough to make credit recipients report changes in income during the year, thus avoiding large overpayments and holding down costs.
Ed Haislmaier, senior research fellow in health policy at the Heritage Foundation, said upping the repayment caps might make the deficit numbers look a little better but wouldn’t resolve basic design flaws in the system. “This is not health policy. This is income redistribution,” Haislmaier said.