Next year, as the Affordable Care Act employer mandate and other provisions kick in, a new issue is sure to make headlines: up to 1 million of the 8 million people enrolled in health exchanges will find they owe more in federal income taxes than they expected, and for some a lot more.  

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Next ACA Crisis: Discrepancy Reconciliation?

Thu May 22, 2014

"If your actual allowable credit on your return is less than your advance credit payments, the difference… will be subtracted from your refund or added to your balance due."

The government may be paying incorrect subsidies to more than 1 million Americans for their health plans in the new federal insurance marketplace and has been unable so far to fix the errors.

“Discrepancy” may be one of the most ominous words in modern finance—whether in payroll, accounts payable and receivable, credit finance or HR. Its appearance demands correction: reconciliation.

Next year, as the Affordable Care Act employer mandate and other provisions kick in, a new issue is sure to make headlines: up to 1 million of the 8 million people enrolled in health exchanges will find they owe more in federal income taxes than they expected, and for some a lot more.

This is because when they file their 2014 federal income tax returns a discrepancy will appear between their actual 2014 household income and the estimate of household income they provided that was used to calculate their federal tax credit that helped pay this year’s health insurance premiums for exchange coverage. The Washington Post reports that “potentially hundreds of thousands of people are receiving bigger subsidies than they deserve.”

To be sure, this scenario wasn’t contemplated when the Affordable Care Act was signed into law in 2010. The law directed IRS and HHS to build essentially two huge computer networks—a front-end enrollment system and a back-end system for premium payments, subsidy calculations and income verification.

However, last fall’s well-known breakdown of the federal exchange enrollment system, and failures of state exchanges in Maryland, Oregon, Massachusetts and elsewhere forced regulators to triage the front-end systems. In an April victory lap the White House announced that the website problems had been solved and that 8 million people nationwide had enrolled in federal and state exchanges.

Last week’s Washington Post article reminded policymakers and the public, however, that the ACA architecture’s second pillar, the back-end payments processing system, does not yet exist. Said the Post, “the federal computer system at the heart of the insurance marketplace…has yet to be built.” Moreover, “According to various recent internal documents, income discrepancies…exist on 1.1 million to 1.5 million out of nearly 4 million inconsistencies overall.”

Of course, the engineers that resuscitated the front-end system can eventually build, test and implement a back-end payments system. But real-time reconciliation is not likely to be functional this year. This means that unless the government waives income verification and payments reconciliation, early 2015 could feature a new ACA crisis—large discrepancies between estimated premium subsidies received and premium subsidies actually allowed; and tax bills for the difference, for maybe hundreds of thousands of people.

The White House and Capitol Hill will be watching this one closely and doing everything possible to accelerate building the back-end process. But as HCM professionals know well, so-called “back office” payments and reconciliation functions are really the circulatory systems of enterprises. Until this system is up and running seamlessly Affordable Care Act success will remain elusive.