yet another cliff

Now that there is some progress on fixing the technical problems with its implementation, I expect the conversation will start to turn back to the actual structure problems with the Affordable Care Act.

Looking ahead the design of the law has several glaring issues that should start to become more apparent as people actually use the law. One of the most problematic and frankly stupid is the exchange subsidy cliff.

Instead of slowly phasing subsidies out with income, the Democrats decided to keep the CBO score low by abruptly cutting subsidies off at 400% of the federal poverty line. What this perversely means is that working harder or get a small raise can actually make some middle class people much poorer.

I will use the Kasier subsidies calculator to create an example.

A Boulder, Colorado couple in their mid 50′s making $61,730 a year would get $4,710 in subsidies to help them afford coverage on the exchange since they make just below 400% of FPL. But if the wife did some extra freelance work pushing their income up to $62,350 they would get no subsidies at all. Effectively an $500 increase in income made them $4,200 poorer. This creates all sorts of problems and bad incentives.

There are basically three ways this couple might be smacked with this cliff:

  1. They apply for coverage and are told they qualify for subsidies but are informed a few days later their insurance will cost thousands more.
  2. They qualifed for subsidies in the past but made the mistake of getting a small raise toward the end of the year. When they go to apply next year they discover that raise cost them thousands of dollars so they need to figure out a way to make less money.
  3. They are hit with clawback in the form of a huge surprise tax bill. If they make slightly more during the year than they planned, on tax day the IRS will inform them they didn’t actually qualify for  the subsidies they thought they did so now they need to buy most of it back. This one is the worst because the couple might have bought less expensive coverage had they known.

I imagine middle class people trapped in this Kafkaesque tax situation are rightly going to generate a lot of media attention and anger in the future. It is a terribly designed policy that could have easily been fixed by changing the subsidy structure but Democrats decided getting around the CBO score was more important.

Photo by tbennett under Creative Commons license