Image source: White House on Flickr.

Today marks the official kickoff of the third open enrollment period for the Patient Protection and Affordable Care Act, which is more affably known as Obamacare.

Between Nov. 1, 2015 and Jan. 31, 2016, consumers will have the opportunity to shop around for health insurance, using Obamacare's online exchanges to make transparent side-by-side comparisons. This relatively new law of the land has so far succeeded in lowering the uninsured rate: The Centers for Disease Control and Prevention recorded the lowest uninsured rate in history during the first quarter of 2015 at just 9.2% (although this includes Medicare enrollees, too). 

But not everything is going according to plan.

Subsidy fraud: The problem few are talking about
The U.S. Government Accountability Office, or GAO, is essentially a watchdog that investigates, audits, and evaluates government agencies to determine if everything is working as it should be. And when it comes to preventing subsidy fraud among people enrolling for Obamacare, the GAO has discovered that the checks and balances in place are far from adequate.

Image source: Social Security Administration. 

In 2014, the GAO conducted a test of the anti-fraud protection system operated by Obamacare in select states and managed to gain subsidy approval in 11 of 12 instances. As noted by the GAO, in five of six instances last year, when it attempted to obtain in-person assistance during the application process, it was unable to. Additionally, when submitting supporting income or citizenship documents in 11 of 12 cases, the documents requests and processes were inconsistent. In fact, when the GAO issued its report in July 2014, all 11 fraudulent applicants were still receiving subsidies, including three that never turned in the requested supporting documents.

Fast forwarding to 2015: It couldn't happen again, right? Actually, based on the latest report from the GAO, things actually got worse! The GAO created 10 fictitious applicants and attempted to enroll them for subsidies in four different states, and all 10 were approved for subsidies! In all four states -- New Jersey, North Dakota, California and Kentucky -- impossible Social Security numbers proved no obstacle in an over-the-phone application. Also, in all four states, employer-sponsored coverage not meeting "minimum-essential" standards wasn't an obstacle to attempts to enroll online. Finally, California and Kentucky allowed for a duplicate enrollment by phone.

Image source: Government Accountability Office. 

When questioning individual states on the findings, the GAO discovered that California's and Kentucky's Social Security identity-proofing process worked correctly, but that the workers in question bypassed the necessary steps to identify the SS numbers as "impossible." Similarly, officials from both states suggested that unless supporting documents look obviously altered, their authenticity isn't questioned.

If there is any consolation here, it's that Obamacare's enrollment safeguards aren't alone in their poor performance. The GAO managed to join Medicaid with fictitious applicants in eight out of 10 tries in 2015.

This is a big problem
As a whole, the Congressional Budget Office projects that Obamacare will cost in the neighborhood of $1.2 trillion between 2015 and 2024, primarily spent on subsidizing coverage for low-income individuals and their families. If a percentage of these subsidies are going to fraudulent accounts, it not only could take away money from those who need it most, but it could increase the cost of the Obamacare program as a whole. Keep in mind here that we're talking about maybe millions of dollars in subsidy fraud compared to a $1.2 trillion dollar program, so any cost increases would be fairly minimal on a relative basis. However, it points to a clear inefficiency in the safeguards to protect the government against subsidy fraud, leading to an inefficient spending of federal money.

Image source: Flickr user David Goehring.

Furthermore, clamping down on overpaid subsidies, such as if someone underestimated his or her income for the full year, is difficult for the IRS. The IRS isn't allowed to garnish wages or seize property in order to collect subsidy overpayments or penalties for failure to comply with the individual mandate. What they can do is take it out of an individual's tax refund.

But what if someone isn't due a tax refund? The IRS has no other recourse but to send you a letter demanding you pay. It could, in theory, take you to court to collect if you don't pay, but with potentially many other cases around the country playing out exactly the same, the chances of that happening are probably slim.

Additionally, over 3 million fewer people received tax refunds last year than the year before, despite 500,000 more returns filed, which makes you wonder. While it's a mistake to assume that correlation implies causation, this trend could mean some consumers are intentionally ensuring they're not due a tax refund in order to avoid having to pay individual mandate non-compliance penalties or pay back some of their subsidy overallotment.

Can this problem be fixed?
With 87% of eligible Obamacare enrollees receiving a subsidy from the federal government, it's pretty clear that something needs to be done to fix the law's blatant tax credit errors. Thankfully, there are two suggestions that might work.

Image source: Social Security Administration.

The first is simply to work with what we're given by beefing up security in areas where it's lacking. States need better tools to verify income and citizenship, and they need employees who are fully trained in recognizing what could be fictitious accounts. Even if it means hiring more people and relying less on online verification processes, states will need to do a better job of recognizing warning signs if the current tax credit program is to be fixed.

The second idea would simply be to give the IRS more power to come after taxpayers for non-compliance of the mandate or subsidies owed. Giving the IRS more power to collect fraudulent subsidies and go after non-compliant individuals could reduce any incentive for people to subvert the system. 

No matter how we look at it, something needs to be done to correct this problem. Really, the only question is how federal regulators aim to tackle it.