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The Dishonor System

A user’s guide to committing fraud on the Obama­care exchanges

Aug 5, 2013, Vol. 18, No. 44 • By CHRISTOPHER J. CONOVER
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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. 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. Specifically, he will be asked:

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. 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. This is many multiples of the 4,720 criminal prosecutions initiated by the IRS that year. 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.

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. 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 [emphasis added].

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