Fraud and abuse: Will delays in ACA verification increase costs?

The Obama Administration announced another delay in implementing a part of the Affordable Care Act. And as if on cue, the criticisms came flying in. This time the concern is one of widespread fraud and abuse.

The problem lies in the delay of verification provisions for subsidies for policies purchased on the insurance exchanges. For the first year, the IRS will not verify incomes to ensure that applicants are in fact eligible for the subsidies they claim.

Exchanges are marketplaces designed to offer insurance to individuals who don't have it and aren't eligible for an affordable employer plan. If an individual has an offer of affordable health insurance from their employer, they do not qualify for a subsidy in the form of a federal tax credit to help them buy it on an exchange.

The federal tax credits are calculated based on income. That income was supposed to be verified by the IRS. Now, with the verification delay in effect, the IRS will not begin to check an individual's income until 2015.

Without the IRS to verify the information a person submits on an exchange, some experts say, "the result starting in October may be millions of people getting subsidies who don't legally qualify," which could "mean huge increases in Obamacare spending."

Fraud and abuse such as this in health care programs is not unprecedented. During the initial roll out of Medicare Part D, the prescription drug benefit, some seniors who should not have received low-income subsidies got them anyway.

The problem begins and ends with the "honor system." "This newly Medicaid-eligible population can now sign up for the exchanges, at no cost to the state, and know that their incomes won't be verified by the IRS," wrote Avik Roy, in a piece on Forbes.

But how likely is this fraud? Is it human nature to lie on government forms?

First, the delay does not restrict exchanges from performing verification themselves. They will have "temporarily expanded discretion to accept an attestation of projected annual household income without further verification." Depending on the state, different verification systems may apply.

This is hardly the only instance of use of the honor system in a federal program. Reporting yearly income and other tax information is based on it. Some experts believe that the government can recover the money spent on fraudulent attestations the next year when people file their taxes.

But there are some barriers to recovering money that has been paid out. For one, some people don't file taxes and thus the IRS will have no way of verifying their income for 2013. Two, the ACA limits the ability of the IRS to recover subsidy overpayments at tax time to a maximum of  $1,750 for an individual (the actual amount recovered is based on income).

In one camp you have the critics who view the delay as a plot to support "tens of billions of dollars of waste, fraud, and abuse in order to accomplish a political objective." In the other, you have predictions that the delay will almost certainly not cause massive fraud and abuse.

These are both extreme views. One factor to keep in mind is that, just as with filing your taxes, the federal government does have the power to recoup tax subsidies that are in excess of what an individual is eligible for. And even with the limitations on the amount of recovery, the law provides stiff penalties for false statements on exchange applications.

All major government programs start with some delays and glitches. In the long-run, this one is likely to have a minor effect at most.