The Patient Protection and Affordable Care Act, which you probably know better as Obamacare, is unquestionably a controversial health reform law, dividing the nation on whether or not it's the right pathway to lower long-term healthcare costs and cut down on the number of uninsured citizens. But on the surface, through two full enrollment periods, the law would appear to at least partly be doing its job.
According to research firm Gallup, the uninsured rate for the fourth quarter of 2014 dropped to 12.9%, the lowest figure on record since it and Healthways first began keeping track of the uninsured rate in 2008. For context, this is down from 17.1% in the fourth-quarter of 2013, right before Obamacare officially went into effect.
Its effect on premium pricing is less clear, because the Great Recession put pressure on healthcare costs and has been the primary cause of low medical-cost inflation during the past couple of years. However, Obamacare's marketplace exchanges, which offer a growing number of transparent insurance plan choices on a state-by-state basis, can't be hurting premium cost inflation.
Two big beneficiaries, but one glaring problem
Among those now enrolled through an Obamacare marketplace exchange, I'd suggest two groups of individuals are generally grateful to receive insurance coverage.
The first would be those with preexisting medical conditions who had previously been shut out by insurers. Under Obamacare, no insurer is allowed to deny coverage on the basis of a preexisting condition. Instead, insurers are counting on the individual mandate -- the actionable component of the ACA that requires citizens to purchase health insurance or face a penalty -- to help spread the high expense of treating individuals with preexisting conditions among newly enrolled healthier individuals.
The other major beneficiary are people making between 100% and 400% of the federal poverty level. Americans making less than 100% of the FPL are covered by Medicaid, but previously, those citizens earning just a bit more than 100% FPL found it difficult, if not impossible, to purchase health insurance. Under Obamacare, qualified citizens are granted a subsidy commensurate with their household income that acts as a "premium tax credit" against their monthly premium dues. The result is a considerably more affordable health plan. Per the Department of Health and Human Services, the average subsidy credit from 2014 (thus the Oct. 1, 2013 through March 31, 2014 enrollment period) was $264, which lowered the average monthly premium payment to just $82.
But, there's one glaring problem that this subsidy-receiving group is discovering this tax season -- if they didn't correctly estimate their income well in advance, they may owe money to the IRS!
Subsidy recipients failed to account for this
According to a new study released this week by the Kaiser Family Foundation (KFF) that examined the reconciliation effects of the 2014 premium tax credit, about half of all people that received a subsidy will be cutting a check to the IRS, while 45% of subsidy recipients will actually receive a refund. In the neighborhood of 5% of subsidy recipients were pretty much spot on with their income estimates.
Why such a major discrepancy? The way the Obamacare Premium Tax Credit was written into law, qualified recipients could either claim the credit at the end of the year while filing their taxes (and receive a refund assuming they were below the 400% FPL), or they could choose to receive a monthly upfront payment based on an estimate of their income in the coming year. Practically everyone chooses the latter, because they'd have trouble making ends meet while paying their premium otherwise.
The problem with this, and what many subsidy recipients failed to account for, is that people's income levels change. Hourly workers can work more or less hours from one year to the next, salaried employees can get bonuses that could affect their year-end incomes, and people can change jobs, get a new or second job, or even get laid off.
Further, the dynamics of the household and the dependents therein can change, which can also affect an individuals' subsidy amount. If income changes, or household dynamic changes occur, it's the consumers' responsibility to notify their state's Obamacare marketplace so it can make the appropriate premium tax credit adjustment. However, few subsidy recipients were apparently aware of this, and now millions are in for a tax surprise!
Complicating matters, subsidy recipients often have to estimate their annual income a year or more in advance, which is practically impossible to do with any consistency.
Perhaps scariest of all, the percentage of those more liable to owe money to the IRS than receive a refund are those citizens who qualify between the 100% and 200% FPL. In other words, the taxpayers most likely to owe money are those presumably with the least amount of disposable income. If there is a small consolation here, it's that a third of all repayments (this goes for all FPL categories between 100% and 400%) are less than $200, and 53% are less than $500. Still, that's of little help to those who have such a tight budget that they can't afford the repayment.
The result, as KFF observes, is that the estimated average repayment for subsidy recipients that underestimated their income is a whopping $794, while the 45% expected to get money back for overestimating their annual income will get an average refund of $773. Based on the nearly 10 million people who qualify for subsidized insurance coverage right now, and the expected 18 million that are expected to receive a subsidy by 2017 per estimates from the Congressional Budget Office, we could be looking at roughly 5 million to 9 million checks being written to the IRS annually for subsidy repayment if KFF's percentages stay consistent in the coming years.
A simple solution
For subsidy recipients, the simplest solution to avoid having to pay back Premium Tax Credit subsidies to the IRS is to take the time each year to accurately estimate your annual earnings, and bump that forecast up a bit higher if possible. This way, if you earn more during the year, you'll have a bit of a buffer in place. The other option here, as suggested by the HHS, is to contact your state's marketplace exchange and have them adjust your annual income. Doing this could save you from a nasty surprise come tax time.
To that end, it's probably not a bad idea for everyone (Obamacare subsidy recipient or not) to formulate a monthly budget so you can better understand your cash flow. If you have a good idea of how much income you're bringing in monthly, and how much you're spending, there's a better chance of being able to save money and build up your emergency fund over time to take care of unexpected expenses, such as repaying the IRS for an overallotment of subsidy credits.