In a recent Health Affairs article, we, along with coauthor Dave Graham-Square, examine a potential pitfall in the design and implementation of the tax subsidies individuals and families may receive through the new health insurance marketplaces beginning in 2014. Next month, eligible Americans will be able to apply for subsidies to purchase health insurance in the new state and federally facilitated insurance exchanges. The amount of subsidy is determined by a person or family’s income over the past year. A problem may arise at the end of the year if income changes substantially and the family’s subsidy levels are not adjusted accordingly. Families may owe large sums at tax time if the subsidies aren’t recalculated as income rises.

Our article examines the extent to which eligible families in California experience income changes, which could have substantial effects on their subsidy levels. Using two-year panels of the Survey of Income and Program Participation (SIPP), matched to the California Simulation of Insurance Markets (CalSIM), we construct the projected demographic profile and participation of the state’s subsidized exchange population in 2018 to 2019.

Why Does Timely Reporting Matter?

We find that it is essential to the success of health reform that income and tax credit amounts be determined as accurately as possible for each individual and family. The Affordable Care Act is designed to provide affordable health insurance coverage to individuals through subsidies, if an individual and their family does not qualify for Medicaid or employer-based insurance coverage. If the risk of having to repay a subsidy is high, the uncertainty could deter some families from taking up coverage in the exchange.

In our study, we predict the share of people receiving subsidies who could be expected to have income changes that could result in subsidy repayments, and the size of those repayments. For this analysis, we examine how both the level and timing of reported income and the methods used to adjust subsidy amounts would affect the required repayments.

Reducing subsidy repayments to a manageable level would require accurately calculating the subsidy at the time of enrollment and making necessary adjustments throughout the year as enrollees’ incomes change. Our article details a variety of ways these calculations could be updated. Regardless of adjustment method, timely reporting of income changes and the subsequent recalculation of exchange subsidies notably reduces the size of repayments.

Families May Face Substantial Tax Liability If This Is Not Addressed

If no income changes are reported during the year, we estimate that 38 percent of subsidy recipients would be in families owing repayments at the time they file taxes, with a median repayment of $857. If all changes are reported and subsidies are adjusted in a timely manner, the share of recipients owing repayments would fall to 23 percent with a median repayment of only $343. The greatest risk is for subsidy recipients in families whose incomes rise above 400 percent of the federal poverty level, who would be required to repay all of the subsidy received.  Timely reporting and subsidy adjustments would reduce the median repayment for this group from $1,650 to $332 per year.

Getting this right in the ACA implementation is important because the unpredictability created by excessive subsidy repayment obligations could act as a deterrent to the use of subsidies and to enrollment in the exchanges.

Easy Steps To Avoid Subsidy Miscalculations

In order to minimize subsidy repayments, exchanges should educate consumers about how tax credits work and provide them the tools they need to make decisions on the amount of subsidy to accept at enrollment. Individuals with incomes between 300 and 400 percent FPL who anticipate a potential increase in income might want to consider waiting to take the subsidy until they file their taxes, or to take a partial subsidy in advance.

Exchanges should educate enrollees about the importance of promptly reporting changes in income, family size, or tax filing status. They should explore additional methods of periodically reminding enrollees to report any changes that have occurred beyond the electronic notification required in federal regulations.  Exchanges should minimize as much as possible the time between when they receive en enrollee’s report of a change in income, when they send the notice of redetermination of eligibility, and when they make the change to the subsidy amount.

Researchers should investigate the cost effectiveness of using data matching to identify people who could face large overpayments and to prompt them to make adjustments. Potential data sources might include quarterly unemployment insurance filings, payroll services, new hire reports, and credit rating agencies.

Enrollees with income increases that may result in large repayment obligations should be educated about ways to reduce their exposure. This could include increased contributions to an IRA, 401(k), 403(b) or other pre-tax retirement vehicle. Exchanges should work with tax preparation firms and organizations to promote consumer education.

This post originally appeared on the Health Affairs Blog.

Elise Gould, Ken Jacobs, and Dylan Roby, ACA Implementation Advice: Encourage Timely Reports Of Income Changes, Health Affairs Blog, 9/13/2013, http://healthaffairs.org/blog/2013/09/13/aca-implementation-advice-encourage-timely-reports-of-income-changes/. Copyright © 2013 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.