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The Dishonor System: A User's Guide To Committing Fraud On The Obama­care Exchanges




Note: a shorter version of this appeared in August 5 print issue of The Weekly Standard released on July 26 and is still available on-line. The author is grateful for the publisher’s permission to reproduce an annotated version here. While I have added links and footnotes that do not appear in the on-line version, the text and figure is reproduced nearly verbatim. Any additions to the substance have been inserted as footnotes.


Let me stipulate that I do not condone fraud in any form. Moreover, I assume all Apothecary readers are law-abiding citizens who would neither commit fraud themselves nor encourage others to do so. My purpose is to inform such readers just how tempting fraud on the Obamacare health insurance exchanges will be in light of the recently announced delays in employer reporting and employer mandates.

There are three types of fraud worth considering, each reflecting different motivations and degrees of risk tolerance among the hypothetical individuals considered.


Mistreated Mike:


Low-income, full-time worker in a large firm offering health coverage.


Mike’s situation: Let’s start with Mistreated Mike, a $14.00-per-hour janitor in a 200-person law firm already offering health coverage. He works 40 hours a week, 50 weeks a year, making his total wage income $28,000. At 116 percent of the federal poverty level, it’s tough to provide for his stay-at-home spouse caring for two toddlers, but he gets $6,026 in Earned Income Tax Credit (EITC) that helps out. Mike’s proud that he’s managed to provide health insurance for his family for years, but it’s expensive. For 2014, he’s selected the most affordable plan his company offers, but he’s crossing his fingers that his family’s out-of-pocket spending won’t reach the average level expected for those who select such a plan: $5,000. Mike’s employer pays much of the $14,100 family premium and fortunately has set up a Section 125 plan so that every penny of Mike’s $3,241 contribution is tax-deductible. Still, that’s a hefty 11.6 percent of his wage income, which might make it appear that Mike’s coverage meets Obama-care’s definition of “unaffordable.” In that case, he would qualify for subsidized coverage on the exchange. Unfortunately, exchange eligibility is restricted to those whose cost for “self-only” coverage under their employer plan exceeds 9.5 percent of household income, and Mike has family coverage. Since Mike’s share of a “self-only” premium would be only 4.9 percent of his income,[1]   he is not legally permitted to buy subsidized coverage through the exchange.


But Mike realizes that he is, in effect, also paying the employer’s share of his premium in reduced wages..[2]  How? He has a twin brother doing the same work as a janitor for a neighboring law firm of the same size. However, because that firm consists only of a few high-paid partners and associates, along with an army of paralegals and legal assistants, it has decided to drop its health benefits in 2014. To replace the lost benefit, the company has already announced it will instead pay his brother about $8,000 more a year to do the identical job.


[3] Mike’s motivation: Here’s what frosts Mike. His brother will get not only a much higher cash wage in 2014, but also a “Silver” health plan comparable to Mike’s, paid for with $15,616 worth of taxpayer-financed exchange subsidies![4] (A Silver plan, under the Affordable Care Act, covers 70 percent of a typical plan member’s expenses. In addition to the subsidy to pay the premium, someone at the income level of Mike’s brother will also receive a cost-sharing subsidy to raise the coverage from 70 to 94 percent of his health spending.) After deducting all taxes and health expenses, Mike’s net income is expected to be $26,884, whereas his brother’s will be $33,350. Mike does not live in one of the 24 states moving forward with Medicaid expansion, so his only prospect for subsidized coverage is through the exchange. In short, Mike can boost his cash income considerably if he can get exchange-subsidized coverage.


The way Mike sees it, Uncle Sam is levying a substantial tax on him simply for working for a large employer that responsibly offers health benefits.[5] How is that fair? Mike appreciates that by not taxing his health benefits Uncle Sam is giving him roughly a 10 percent discount on all his health spending. He just can’t figure out why his brother is getting an 82 percent discount, especially now that his brother’s wages are substantially higher than Mike’s.


Given how well-informed Mike is, it won’t surprise you to learn that he remembers all the sordid backroom deals that were required to secure votes for Obamacare​—​the “Louisiana Purchase,” “Gator Aid,” the “Cornhusker Kickback,” and a deal with big hospitals, among others.[6] And he’s been appalled by the flagrant favoritism accorded certain political groups such as unions and public employees in Obamacare’s rollout to date. Not surprisingly, the entire law is feeling to Mike like an organized kleptocracy​—​with vast amounts of taxpayer resources redistributed in a manner no one could possibly claim is fair. Mike has concluded that a government that gives his higher-wage brother a $15,616 subsidy for identical coverage clearly is not watching out for him.

He’s decided to do what it takes to tip a very unlevel playing field back in his own favor.


Mike’s calculation: The administration’s ineptitude in rolling out Obama-care has given Mike a lucky break. In 2014, his employer may not be reporting to the exchange any details about the coverage offered him at work. The final rule on premium tax-credit eligibility verification requires that any applicant for premium tax credits attest to the exchange whether he or she has employer coverage, its cost, and extent.

For the lowest-cost plan that meets the minimum value standard offered only to the employee (don’t include family plans):


a. How much would the employee have to pay in premiums for this plan? $________


b. How often?

[ ] Weekly

[ ]  Every 2 weeks

[ ]  Twice a month

[ ]  Quarterly

[ ]  Yearly


Even though reporting to the exchanges has been delayed one year, all employers subject to the minimum-wage laws are required to send a notice to all employees by October 1, 2013. Also, the plan affordability/minimum-value information still must be provided.


What are the risks? Let’s be clear: There are potentially steep penalties—up to $250,000—for committing fraud but not for making an honest mistake.[7]  According to legal site Nolo.com: “Although auditors are trained to look for fraud, they do not routinely suspect it. .  .  . They will give you the benefit of the doubt most of the time and not go after you for tax fraud if you make an honest mistake.”


Indeed, the IRS flagged nearly five million tax returns for math errors in fiscal year 2011.[8]    This is many multiples of the 4,720 criminal prosecutions initiated by the IRS that year.[9]  Since the exchange will be electronically cross-checking income information against information it gets from tax filings, Social Security data, and current wages, Mike would be safest by honestly reporting his income to the penny and instead fudging the cost of coverage so that his company plan seems to fail the affordability test.


[10] Depending on how Mike’s employer reports this premium information to him (i.e., as a weekly, monthly, or yearly amount), he can simply make a convenient mistake. $2,660 a year is the magic number, i.e., greater than 9.5 percent of his income. So he needs to convince the exchange that his share of the premium exceeds this amount. If, say, his employer reports the actual employee-only premium as $26.54 weekly, he could report $56.54 as the amount the employee has to pay. This is not a flagrantly suspicious amount.[11] Moreover, if later challenged, Mike could chalk it up to sloppy handwriting (“Oh, that’s a 2, not a 5”) or an inadvertent transcribing error.

Will Mike get caught? According to Timothy Jost at the HealthAffairs blog,


If the exchange finds information incompatible with the applicant’s attestation, it will ask the applicant to provide evidence to resolve the inconsistency. In most instances, however, there will be no electronic data available to confirm the attestation. In these cases, the exchange will select a statistically significant random sample of cases in which it only has the attestation and, after notice to the applicant, contact the employer to verify the information. If the employer provides information incompatible with the applicant’s claims, the exchange will ask for further proof. In cases where the employer does not respond, however, or that are not part of the random sample, the exchange will rely on the applicant’s attestation .The rule does not articulate what is meant by “statistically significant random sample of cases.” However, we can get a rough idea from the EITC program, where the IRS in fiscal year 2011 audited 2.2 percent of returns claiming such credits.[12] Thus, Mike’s odds of getting caught through the random sample are pretty slim; if he is unlucky enough to be caught, he essentially will be given advance notice that they suspect something and an opportunity to come clean.


Potentially, there is another way Mike could get caught. Both the exchange and the IRS are required (even in 2014) to notify employers every time one of their employees receives premium tax credits.[13]   After 2014, employers will be liable for a penalty if one of their employees gets subsidized coverage on the exchange. But in 2014, the question is what Mike’s employer will do when notification is sent that he has obtained subsidized exchange coverage.


Quite likely, nothing at all. After all, what is the employer’s incentive to respond to this notice? No adverse consequence would arise from ignoring it. Hypothetically, a highly diligent human resource employee with ethical objections to claiming a tax benefit improperly might elect to blow the whistle. But an employee that hyper-aware presumably also would recognize the gross inequity of the entire employer-mandate structure and the fact that Uncle Sam is effectively imposing a tax on workers in large firms, even as it provides massive subsidies to their equivalently compensated counterparts at large firms that “pay” rather than “play”—i.e., decide that paying the penalty is cheaper than providing health benefits. All things considered, it seems likely either that Mike’s transgression will be ignored or that he will have the same opportunity to rectify his “inadvertent” error.- The Koyal Group