President Obama's deficit reduction package unveiled Monday would fix a health reform defect that could cost taxpayers $14.6 billion.
The Affordable Care Act as it stands would allow middle-class early retirees to get virtually free health coverage by qualifying for Medicaid, a program meant for the poor. It would also have unintended consequences for tax credits that will help Americans buy private health insurance through exchanges in 2014.
Tax credits and a Medicaid expansion are both planned to help cover 30 million uninsured people.
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The Associated Press reported on the problem in June. [See Fuzzy math in health law formula] Under the health law, income withdrawn from Social Security by early retirees would not be counted when determining eligibility for Medicaid and for the tax credits.
AP explains the loophole:
To see how the Social Security wrinkle would work, consider a hypothetical example of two neighbors on the same block.
They are both 62 and each makes $39,500 a year. But one gets all his income from working, while the other gets $20,000 from part-time work and $19,500 from Social Security.
Neither gets health insurance on the job. Instead, they purchase it individually.
Starting in 2014, they would get their coverage through a new online health insurance market called an exchange. Millions of people in the exchanges would get federal tax credits, based on income, to make their premiums more affordable. Less-healthy consumers could not be turned away or charged more because of their medical problems.
The neighbor getting Social Security would pay an estimated $206 a month in premiums.
But the neighbor who makes all his income from work would pay $313 for health insurance, or about 50 percent more.
The early retiree can shield half his Social Security income, or $9,750. On paper, he would look poorer, making him eligible for a bigger tax credit to offset his premiums. But the full-time worker could not deduct any of his earnings.
According to the deficit reduction plan, the Obama administration is proposing to amend the modified adjusted gross income definition so that it includes Social Security benefits when determining eligibility for "health exchange tax credits and cost sharing reductions, Medicaid, and CHIP [the Children's Health Insurance Program]."
Similar legislation was introduced this summer by senators on both sides of the aisle. [See Fixing glitch in Obama's health law saves $13B]
Obama's debt reduction plan projects the move would save $14.6 billion over 10 years.
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