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January 15, 2014

The Next Obamacare Crisis

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After a botched rollout that was universally panned, it may seem like things are finally moving more smoothly for Obamacare. But 2014 and beyond promise more turbulence for consumers, with premium tax credits likely to be another crisis.

On January 1, Obamacare’s subsidized exchange coverage began. The Congressional Budget Office projects that exchange subsidies, both the premium tax credits and cost-sharing subsidies, will cost more than $1 trillion over 10 years, with up to 19 million people receiving federal subsidies to offset the cost of their exchange coverage in 2023.

Those who earn anywhere between 100 percent and 400 percent of the federal poverty level ($11,490 to $45,960 for individuals and $23,550 to $94,200 for a family of four in 2013) and are not offered affordable and adequate coverage elsewhere will be eligible for Obamacare’s premium subsidies. These subsidies are applied on a sliding scale, with Americans in the lowest income level receiving the highest premium subsidy.

The credit can be claimed when filing the year’s taxes but it will more likely be used in advance as a way for consumers to lower their monthly premiums. But therein is the problem: The tax credits are tied to the enrollee’s monthly income. Thus, if a person’s income fluctuates, which happens more frequently than many realize, the subsidy amount will change from month to month. Thus, when it comes time to file taxes in April, the amount of subsidy received over the past year must be reconciled with the final calculation of the total subsidy for which the individual was eligible—based on actual income for the entire tax year.

So if you qualify for more subsidy help than you receive during the year, you’ll get a tax refund. But if you were given more subsidy than your income qualifies you for, you will be required to repay the excess subsidy.

However, repayment of the excess subsidy is capped for all those earning less than 400 percent of the federal poverty level (FPL). For those who earn less than 200 percent of the FPL, an individual’s repayment is capped at $300 and family’s capped at $600. For those between 200 percent and 300 percent of the federal poverty level, an individual is capped at $750 and a family repayment is capped at $1,500. And for those who earn at least 300 percent of FPL but less than 400 percent, repayments are capped at $1,250 for an individual and $2,500 for a family.

Only Americans making more than 400 percent of the federal poverty level would be forced to repay all of an incorrectly calculated Obamacare subsidy.

And if subsidized Obamacare exchange enrollees don’t report any changes in their income throughout the year, they could be on the hook for potentially expensive repayments come tax time.

To that end, an analysis published in Health Affairs estimated the number of enrollees who might be subject to repayment and how much repayment would cost. Researchers found “that family income fluctuated greatly from one year to the next” for the American families eligible for Obamacare subsidies, with an expected “37.8 percent having large income increases, while 35.5 percent facing large decreases. Thirty percent of recipients were in families whose income increased more than 20 percent, and 18.9 percent had income increases of more than 40 percent.”

In addition, the authors found the median Obamacare repayment—if no income changes were reported and no adjustments were made to subsidy amounts over a year— would be $857.

Subsidy repayments are just one more headache that Americans don’t need when it comes to their health care. The issue is symptomatic of many problems that will plague the law in coming years. The Obamacare crisis is multifaceted and far from over.

 - Alyene Senger is a research associate in the Center for Health Policy Studies at The Heritage Foundation.

Originally appeared in The National Interest

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