Incentives to underestimate income

Given that federal subsidies for Affordable Care Act (ACA) plans is around $1 trillion, one would expect find to attempts to defraud the system. For example, one area that recently came to light was that many insurance agents change enrollment of existing patients without their knowledge or consent. KFF Health News reported on another way that people may try to defraud the system: understating their estimated income to receive more generous subsidies.

The article discusses a study that concludes that too many people sign up and declare that their estimated income falls within a certain range: "We estimate that fraudulent enrollment at 100 percent to 150 percent FPL [federal poverty line] is likely upwards of four to five million people in 2024. We estimate, conservatively, that this cost will likely be upwards of $15 to $20 billion this year." Apparently, during open enrollment, patients only need to estimate their income for the following year in order to determine how much subsidy they are entitled to. Theoretically, differences between estimated income and actual income will balance out when those patients file taxes for the following year. For example, patients whose incomes are higher than estimates would owe the difference in subsidies as additional tax. However, patients whose income is less than 400% of the federal poverty line would have the difference in subsidies capped (e.g. $950 for those between 200% and 300% of the federal poverty line). On one hand, the limit seems helpful in protecting patients against the financial consequences of unexpected rise in income. On the other hand, these limits present a tremendous incentive for people whose income is less than 400% of the federal poverty line to underestimate their income to receive more generous subsidies and then to only pay back a limited amount. Essentially, the federal government is subsidizing health insurance plans more than it planned to.