Two federal government decisions last week on health reform have sparked concern that Covered California, the state's health insurance exchange, could be hit with a higher-than-expected volume of applications for subsidized medical coverage -- some of them potentially fraudulent.
A one-year delay in one of the central requirements of the Affordable Care Act -- that employers with over 50 full-time workers provide health insurance or pay fines -- is almost certain to bring more people into the exchange during the first 12 months than would have been the case.
The question is, how many?
The potential impact of the delay was compounded when the U.S. Department of Health and Human Services said three days later it was temporarily relaxing rules for verifying information submitted by people who apply for federal tax subsidies on coverage they purchase through the exchanges. That led to warnings in some quarters that certain individuals, eager for a discount, might submit falsified documents to qualify for the means-tested tax credits.
Covered California, established under the Affordable Care Act to sell insurance to people who don't get affordable coverage from an employer, will begin enrollment Oct. 1 for health plans that take effect Jan. 1. Tax subsidies are available on a sliding income scale, phasing out at annual income of just under $46,000 for an individual and slightly over $94,000 for a family of four.
The requirement that individuals be covered or pay a fine remains intact and will take effect on the same date as the exchange health plans, while the employer mandate to provide insurance is now put off until January 2015. That means people who might otherwise have been covered for the first time by their employers will need to buy coverage themselves or pay a penalty.
"I can tell you firsthand that there are a lot of employers who were gearing up to provide coverage next year to folks who don't currently have it and are now going to hold off until January 2015," said Sheldon Blumling, a labor lawyer at the Irvine-based firm Fisher & Phillips, who advises companies on the Affordable Care Act. "People who are part of a group like that will now have subsidized exchange coverage available to them."
Some insurance agents and others in the health care field predicted that, with applications receiving reduced scrutiny during the first year, a subset of applicants might be tempted to seek the highest possible subsidy by misrepresenting their income, or by lying about whether their employer provides affordable coverage, or both.
"If people are willing to lie to get free lunches at school and enroll themselves in Healthy Families (publicly funded insurance for poor children), what makes the government think they are not going to lie to get free health care?" asked Jim Douglas, vice president of benefits at J.L. von Arx Insurance Services in Los Alamitos.
Others downplayed that concern. Larry Levitt, a senior vice president of the Kaiser Family Foundation, said the temporary new verification rule doesn't represent a radical departure. He noted that when people file tax returns or make estimated tax payments, they are not required to document everything upfront.
"These subsidies are part of the tax system, and this is the way we handle much of what goes into income tax calculations, which is in effect the honor system -- unless you get audited," Levitt said.
In a Health and Human Services blog post called "myths vs. facts" -- intended to counter what it said were "mischaracterizations" and "confusion" following last week's announcements -- the department said the exchanges "will always check the income information submitted by individuals" against tax returns, Social Security data and other verifiable sources.
But the new rule only says that if there are discrepancies -- during the first year -- the exchanges "will have the option" to conduct sample surveys of such cases. And in other cases they may simply accept the word of the applicant without further checking.
However, the HHS noted, as did Levitt, that ultimately it would be difficult for people to get away with falsifying income on an exchange application, because the amount they state will be compared months later with their federal tax filing. Any subsidy received that is not justified by the income shown in the return will have to be paid back.
Income is only one of two factors determining eligibility for subsidies. Applicants must also show that their employers do not offer insurance, or that the employee contribution to coverage that is offered exceeds the affordability threshold, which is 9.5 percent of their gross income.
It is unclear how the exchanges will be able to verify the claims of applicants about their insurance status during the first year, given the delay in reporting by employers. And the new rule grants them a one-year reprieve from having to do so, acknowledging that some still "may not have the resources and operational capability."
Anne Gonzales, a spokeswoman for Covered California, said it is not clear how the state's exchange will respond to this new rule. "We don't specifically know how we're going to verify," she said. "Since it is new, we are still reviewing it."
Blumling, the labor lawyer, said the inability to verify employer coverage status, not income, is where the trouble will lie for the exchanges. There will likely be some deliberate deception, he said, "but what is more likely is that applicants will give misinformation to exchanges because they are confused."
But the serious trouble people can land in for falsifying an exchange application, or even for the appearance of having falsified it, should be a big incentive to get it right, said Cathy Daugherty, a partner at Moore Benefits Inc. in Irvine. The health reform law levies a fine of up to $25,000 for deliberately falsified applications -- in addition to possible perjury charges.
"That's going to scare people," Daugherty said.
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