Let me stipulate that I do not condone fraud in any form. Moreover, I assume all Weekly Standard 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.
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, 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. 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.
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! (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. 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.