CBO and the staff of the Joint Committee on Taxation (JCT) have assessed the effect of the recently announced one-year delay in the imposition of penalties for certain large employers and the corresponding delay in the implementation of two reporting requirements for certain large employers and health insurance coverage providers under the Affordable Care Act (ACA). This letter describes the changes CBO has made in its current-law projections to reflect those actions and recently issued final regulations.
What the Administration Announced
Under the ACA, certain large employers that do not offer health insurance coverage that meets the affordability standard defined in that law will be subject to penalties. In addition, insurers and certain other health coverage providers (primarily employers that self-insure) will be required to report the names of those receiving coverage, and certain large employers will be required to report on the health insurance coverage offered to their full-time employees. On July 2, 2013, the Administration announced its decision to delay for one year the penalties for certain large employers that do not provide affordable coverage, as well as to delay reporting requirements for insurers and employers.
In addition, the Administration recently released final regulations specifying the procedures to be used to ascertain and verify whether people applying for tax credits for premiums on insurance provided through the exchanges have an affordable offer of coverage from their employer and what their income is. Under the ACA, applicants for premium tax credits will be required to provide information in their application about any coverage by their employer for which they are eligible. The exchanges will check available databases to verify that information, but, for many applicants, no supporting information will be available. In those cases, exchanges will be required to contact employers to verify the information for a statistically valid sample of applicants; some of the exchanges operated by states had planned to rely on the Department of Health and Human Services (HHS) to perform that follow-up verification. However, the final regulations indicate that HHS will not conduct follow-up verification on behalf of state-based exchanges until January 1, 2015, one year later than expected. As a result, in 2014 only, if an applicant’s attestation cannot be verified through available databases, state-based exchanges will have the option to accept the attestation as final without conducting further verification. However, that option applies to state-based exchanges only; HHS indicated in the final rule that federally facilitated exchanges will pursue follow-up verification for a statistically valid sample of applicants in 2014, as expected.
Also, under the ACA, applicants for premium tax credits will be required to provide information about their household’s income, to be verified through electronic sources of information about people’s income, such as tax returns and Social Security Administration records. If the income reported by an applicant is significantly less than the amount of his or her income indicated by other available data or if data to verify a household’s income are not available, then the exchange will request supporting documentation from the applicant. For 2014 only, the final rule allows exchanges to request additional documentation either from such applicants or from a statistically valid sample of those applicants. For an applicant that is not contacted by exchanges to provide further documentation, advance payments of premium tax credits will be based on the applicant’s attestation. However, the law also provides that if an individual’s advance payments exceed the amount of the premium tax credits to which he or she is entitled on the basis of his or her actual year-end tax return, that person may be required to repay some or all of the credits, subject to certain limits based on income.
How CBO and JCT Updated Their Estimates
Following its usual procedures for incorporating new information in its estimates, CBO now assumes that penalties on employers and certain reporting requirements will not be enforced in 2014. In its May 2013 baseline projections, CBO projected that the insurance coverage provisions of the Affordable Care Act would have a net cost to the federal government of $1,363 billion over the 10-year period from 2014 to 2023. (The ACA includes many other provisions that, on net, will reduce federal budget deficits. Taking the coverage provisions and other provisions together, CBO and JCT estimated that the ACA will reduce deficits over the next decade.) As a result of the Administration’s announcement and recently issued final rules, the net cost is now estimated to be $1,375 billion—$12 billion more than previously estimated. The largest change is a $10 billion reduction in penalty payments by employers that would have been collected in 2015. (Penalties assessed for 2014 would have been collected in 2015.) Costs for exchange subsidies are expected to increase by $3 billion. Other small changes, including an increase in taxable compensation resulting from fewer people enrolling in employment-based coverage, will offset those increases by about $1 billion, CBO and JCT estimate.
The budgetary effects other than the loss of revenues from penalty payments stem primarily from changes in how many people will obtain insurance coverage and from what source. CBO and JCT expect that some large employers that would have offered health insurance coverage to their employees in 2014 will no longer do so as a result of the one-year delay of penalties for those that do not offer affordable coverage. However, most large employers currently offer health insurance coverage to their employees, and because the delay is only for one year, CBO and JCT expect that few employers will change their decisions about offering such coverage.
Further, as a result of the temporarily looser procedures for verifying offers of employment-based coverage, CBO and JCT expect that some additional workers with affordable offers from their employer will obtain subsidized coverage through exchanges in 2014. However, applicants for subsidies will still have to provide exchanges with information about how to contact their employer and will have to sign a statement indicating that their answers are accurate to the best of their knowledge; moreover, employers will be notified of employees who qualify for premium tax credits. Consequently, although CBO and JCT expect that the verification process will have significant effects on people’s behavior in coming years, the temporary loosening of verification procedures in 2014 is estimated to have only a small effect.
CBO and JCT also anticipate that the change in procedures for verifying income will have only a slight impact on the number of enrollees in the exchanges and on the accuracy of their income reporting because the Internal Revenue Service will be able to identify misreporting when it compares reported income with tax returns at year-end.
In addition, CBO and JCT expect that the delay in implementing reporting requirements will have only a negligible effect on sources of insurance coverage and on revenues collected through the penalties for individuals who do not obtain coverage in 2014. Although CBO and JCT expect that the reporting requirements will have significant effects on people’s behavior in coming years, the projected effects on coverage and revenues from penalties for 2014 (which will be collected in 2015) are already lower than the projected collections in subsequent years to allow for initial difficulties in implementing those provisions of the law. Moreover, the Administration has said that it will encourage insurers and self-insured employers to voluntarily comply with the reporting requirements and report the names of those covered to the Treasury.
All told, as a result of the announced changes and new final rules, roughly 1 million fewer people are expected to be enrolled in employment-based coverage in 2014 than the number projected in CBO’s May 2013 baseline, primarily because of the one-year delay in penalties on employers. Of those who would otherwise have obtained employment-based coverage, roughly half will be uninsured and the others will obtain coverage through the exchanges or will enroll in Medicaid or the Children’s Health Insurance Program, CBO and JCT estimate. In particular, fewer than half a million additional people are expected to be uninsured in 2014 than the number projected in the May baseline.
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