Too poor for a health premium subsidy

Posted: September 02, 2013

Will low-income Pennsylvanians be tempted to overstate their income to the IRS in order to afford health insurance? The state's rejection of Medicaid expansion for its poorest citizens creates this perverse incentive.

The Affordable Care Act was set up to provide free Medicaid to more poor Americans. It also offers premium subsidies on a sliding scale for the uninsured with incomes between 100 percent and 400 percent of the federal poverty level.

These subsidies are tax credits the IRS will pay in advance to health insurers for qualifying individuals. To get these subsidies, people must estimate their income for next year when they apply for health insurance.

The U.S Supreme Court fractured this legislative plan in July 2012 when it decided that forcing states to expand Medicaid was unconstitutional, even though the federal government would bear most of the costs. The court gave states the right to reject the Medicaid expansion. The Obama administration then concluded it had no authority to grant subsidies to people with incomes below the poverty level.

The result is that in Pennsylvania, which has declined to expand Medicaid, about 700,000 people will be stuck in limbo. They make too much for Medicaid and too little to qualify for subsidies.

In October, uninsured people will start selecting health plans so they have coverage by January, when the so-called individual mandate takes effect.

Let's consider an example of what might happen to an uninsured person below the poverty level.

Imagine Mary, a 30-year-old single mother with one child, working full-time and earning minimum wage busing tables. The fact that Mary works is typical. Most of Pennsylvania's uninsured between ages 19 and 64 are employed, two-thirds of them working full-time, a state insurance department-sponsored study found.

The fact that Mary's employer does not provide health insurance is no stretch, either. The same study showed that most employers who don't offer coverage are small. Though the Affordable Care Act offers financial incentives to small firms to cover workers, the so-called employer mandate that begins in 2015 applies only to those with at least 50 full-time employees.

So if Mary wants health insurance, she will have to buy it.

Mary earns minimum wage. That's $15,080 a year in Pennsylvania, the same as the federal minimum wage. That's just below the poverty level for a family of two: $15,510 a year.

So even though Mary works full-time, her income falls $430 short of qualifying for a subsidy. Her child will be covered by Medicaid under traditional rules, which favor children.

But Mary will have to pay the full premium, deductibles, and copayments out of her minimum-wage salary.

What will this cost? We don't yet have figures for Pennsylvania. But using California as a model, Mary's premium for a cheaper "silver" plan (the law classifies plans as bronze, silver, gold, and platinum) would likely be $200 or more per month - at least $2,400 a year. Mary also faces deductibles and copayments if she gets sick or injured. Silver plans are set up so the insurer pays 70 percent of members' health costs, with the member paying 30 percent in "cost sharing."

If Mary made an extra $430 next year, her premium subsidy would give her the same coverage for the whole year for about $300, saving her more than $2,000 a year. She would also qualify for protection against inordinately high deductibles and copayments, with a cap on her annual out-of-pocket costs (in addition to premiums) of $1,983 in 2014. So no matter how sick she got, her total cost would be hundreds of dollars less than the premiums alone for someone below the poverty level.

Mary could get free health care by moving across the state line to New Jersey. Or to Delaware, Maryland, West Virginia, or New York. Republicans and Democrats in those states have backed the Medicaid expansion. But many other states, especially in the South, have not.

Mary could save the moving costs and help herself by conveniently "recalling" a few tips customers gave her. About $36 a month of improved "memory" is all it would take. Or she might find an envelope on the sidewalk with $302 in it. The U.S. Department of Health and Human Services, which approves the subsidies, recently said it would verify the projected income of all applicants. But most uninsured workers in Pennsylvania are in service industries, and verifying tips, or "found" money, or even cash payments from relatives or friends for babysitting, dog-walking, hair-cutting, or the like, would seem impossible.

Or maybe some combination of honesty and lack of sophistication will leave Mary too poor for government help. That's the way the system will work in Pennsylvania.


Michael Campbell is visiting assistant professor of law at Villanova University. Contact him at mcampbellhealthlaw@gmail.com.

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