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Health Reform Rule Change Will Not Stop Important Verification

In the last several days, some media coverage has seriously misinterpreted changes to how health reform’s new health insurance marketplaces (formerly called exchanges) will verify that applicants are eligible for federal health insurance subsidies.  The changes to verification procedures, which the Department of Health and Human Services (HHS) announced in a new rule on Friday, are really rather modest.  All marketplaces — both state- and federally run — will still conduct important checks of applicants’ income and require applicants to provide information on any coverage that employers offer.

The changes announced Friday apply only to the 16 states (plus the District of Columbia) that will operate their own marketplaces, and the changes — which are optional for these states — are designed to make the process easier for the states to administer as they get their marketplaces up and running.  The changes do not affect the remaining 34 states that will rely on the federally facilitated marketplace to determine eligibility for the health insurance subsidies, which will come in the form of premium tax credits.

Moreover, a rigorous income verification process remains in place in all states, including those that will operate their own marketplaces.  All marketplaces must first check the income level that an individual reports on his or her application against a federal database that contains data on the applicant’s federal income tax returns, as well as information on his or her Social Security benefits if any.

If an applicant reports a significant drop in income (more than 10 percent) from the income shown on his or her last tax return, then both the state and federal marketplaces must check additional electronic data sources, such as state and commercial databases that provide information on employment income, to verify the income decline.

Here’s where the change comes in:  it applies to the small percentage of cases where 1) an applicant reports income to the state marketplace that is substantially lower than the income level on the applicant’s last tax return, and 2) no additional electronic sources of income data are available that can confirm the drop in income.

In these cases, the state marketplace can request additional information from the applicant or his or her employer as part of a more detailed verification process.  The change is that, for 2014 only, the state marketplace can accept the income level reported by the applicant.  However, if the state adopts this option, then the marketplace must conduct additional verification on a random sample of applications in this category of cases to ensure that relying on applicants’ reported changes in income is working.

It is critical to note that even if this process results in some inaccuracies for a small share of subsidy recipients, there is a back-up that will come into play in virtually all such cases.  The marketplaces only determine the amount of advance payments of the premium tax credits.  The final amount of an individual’s premium credit is determined based on individual’s actual income for the year as reported on the individual’s tax return, filed after the year is over.  Individuals who under-report their income will have to pay back excess advance payments of premium credits when they file their taxes.

The HHS rule also provides a similarly-narrow exception to verifying whether an applicant has received an offer of coverage from his or her employer.  Here, too, the exception is for 2014 only and applies only in the 16 states that will run their own marketplaces.  Applicants with an offer of employer coverage will still have to provide information that they obtain from their employers on whether the employer-based coverage is affordable and meets minimum coverage standards.  Originally, HHS was going to help the 16 states by conducting a random sample of cases to verify the information regarding job-based coverage on the applications, but will not take this on until 2015.  Rather than require the states to take on that task with little notice, HHS is allowing states to forgo sampling until HHS can do it for them in 2015.

The new regulation is complex and comes in the wake of a rule delaying a requirement that employers must provide certain information to the marketplaces.  This may be the source of some of the apparent confusion and misunderstanding of what the new rule does and doesn’t do.  But people interested in these issues should make no mistake:  the state and federal marketplaces will continue to verify income data, and applicants must still supply information about their job-based coverage.