Financial engineering in the ACA

Sometimes it is nice to see good empirical work confirm expectations. The ACA subsidy structure has a hard start-point and a hard shut-off point (100% to 400% Federal Poverty Level). We should expect to see people who are just outside of that range work really hard to get inside of that range. We would really expect to see people who make under 100% FPL in non-Medicaid expansion states find ways to get to 100% FPL. And that is what two papers show.

The first is an analysis of tax documentation from 2016 for people at the top of the subsidy scale:

o examine the extent to which taxpayers’ incomes bunched below 400% FPL, we analyze a sample of taxpayers from 2013-2014 drawn from data maintained by the Internal Revenue Service’s (IRS) population of U.S. individual income tax returns. We find a significant amount of bunching below 400% FPL in 2014 that is only apparent among those who purchased insurance from a marketplace, and so would be potentially eligible for a subsidy. Further, we do not find such bunching among this same group of taxpayers in 2013, when the subsidies were not available. We see evidence of bunching at the cliff both among the self-employed and among wage and salary workers. We also calculate potential subsidies at 399% of FPL, and find that those whose income fell right below 400% FPL tended to be eligible for larger subsidies than those whose income fell above the cliff.
Finally, we examine the manner in which taxpayers lowered their income to keep it below the cliff, and examine whether such a response is consistent with a change in real economic activity, tax avoidance, or evasion. We see some weak evidence of reduction in wages on the left side of the cliff which is suggestive of labor response. However, the bunching appears to primarily have been driven by increases in contributions to IRA accounts.

People who make just over 400% FPL engaged in financial engineering to make their Modified Adjusted Gross Income (MAGI) shrink. This was more common in regions with high premiums than low premiums and I am betting that it was more common among older rather than younger tax filers given the nature of the age band and subsidies.

Now the other paper looks at the bottom of the scale and how people responded to living in non-expansion states. This is from the Census:

Lacking access to any form of subsidized health insurance, residents of those states with income in that range face a strong incentive, in the form of a large, discrete increase in post-tax income (i.e. an upward notch) at the FPL, to increase their earnings and obtain the premium tax credit. We investigate the extent to which they respond to that incentive. Using the universe of tax returns, we document excess mass, or bunching, in the income distribution surrounding this notch. Consistent with Saez (2010), we find that bunching occurs only among filers with self-employment income. Specifically, filers without children and married filers with three or fewer children exhibit significant bunching. Analysis of tax data linked to labor supply measures from the American Community Survey, however, suggests that this bunching likely reflects a change in reported income rather than a change in true labor supply. We find no evidence that wage and salary workers adjust their labor supply in response to increased availability of directly purchased health insurance.

In simpler terms, people who were reporting incomes below 100% FPL started to report more income in order to qualify for a Silver cost sharing reduction (CSR) plan with premium subsidies. This is expected as I explained in 2014:

Soccer refereeing is overwhelmingly a gray market economy. It is a legal enterprise where most low level games are paid in cash at the field. Minimal records are kept. Higher level games (college, professional, some high school, regional and national level youth tournaments) are paid by check where records are kept for 1099 purposes….
one of the guys who referees nearly full time pulled me aside and asked for some advice. We live in a non-expansion state, and he wanted health insurance but his declared 2013 income was $9,500 which is significantly below 100% of the federal poverty line and thus under the subsidy line. A catastrophic policy was available at $150/month but it covered almost nothing. Was there anything I could do to help him?

I asked what he was planning on declaring for 2014? …. that summed out to be about $10,000, which again is below 100% of FPL. I aked him if he worked any other games… He accounted for another $4,500 worth of work from USSF and other high school games. That would place him well over 100% FPL if he declared all… I told him it was his choice, but declaring the income and bringing it into the white/overt market instead of the gray market would allow him to get a cost sharing Silver plan for $33 a month.

Financial engineering off moving money from Adjusted Gross Income (AGI) to invisible to MAGI income as well as financial engineering of moving money from the gray market to the declared market are completely expected responses to the ACA subsidy structure. It is nice to see confirming evidence on both ends of the incentive.

9 replies
  1. 1
    Julie says:

    Interesting papers. Another incentive created by the ACA is for early retirees with IRA/retirement accounts to adjust their annual withdrawals so as to qualify for a larger subsidy.

  2. 2
    low-tech cyclist says:

    If you have MAGI income, make sure they pay off in gold. It’s really hard, these days, to convert frankincense and myrrh into cash.

  3. 3
    piratedan says:

    well, say that we finally throw out the GOP in the 2018 midterms and flip the house and maybe even bring the senate to 50/50… what kind of legislation would we need to have written to unfuck the damage that the GOP has already performed?

  4. 4
    Victor Matheson says:

    @piratedan: Well, on the ACA side not much has changed, yet. If the Dems can keep the ACA from being repealed and replaced, then not a ton will have to be done. And the presence of a wave election caused in part by rejecting GOP health care reforms might be just the thing to scare some non-expansion states into adopting Medicaid, especially if the Dems passed a line item that allowed new Medicaid adopting states to start a new clock on when the state has to start kicking in money. Originally the ACA had states getting several years of Medicaid for free and then slowly having to pay up to 10% of the bill. Those several years are pretty close to running out now (Mayhew would know the details), but it would be a simple enough policy to pass a bill that says that states get xxx number of years of free Medicaid from the time the states adopt the expansion rather than from the time of the passage of the ACA.

  5. 5
    Victor Matheson says:

    “He accounted for another $4,500 worth of work from USSF and other high school games. That would place him well over 100% FPL if he declared all…”

    In 32 years of getting paid to referee soccer, I have never before heard of a case of a referee wanting to figure out how to claim more officiating income on their taxes.

    And I applaud Mayhew for a post that connects both soccer refereeing and the ACA. And they said it couldn’t be done!

  6. 6
    David says:

    Why do they design these things with such hard lines for limits. If there were a slow phase out from, say, 300% to 500%, people wouldn’t have such an incentive to game the system.

  7. 7

    @Victor Matheson:

    I can connect almost anything to the ACA with enough motivation.

    My buddy’s instinct was to minimize his reportable income but as you know, shitty grass fields and dilapidated field turf fields do wonders for your knees and back. And as you know even better than I do, the funnel to go from a promising 5 to a working MLS AR is brutal to people who are in the “Worth a shot” but not in the fast track lane. If there is a persistent injury that could have been treated and resolved but was not that makes the ref a step or two slower on a critical sprint, there goes an assessment from good enough to a pass but not pass along for promotion.

  8. 8

    @David: The 100% line was never intended to be a meaningful line except for finance geeks. My buddy in the original scenario was supposed to be on Medicaid. The Supreme Court rewrote the law for shits and giggles.

    As for 400% it should have been a percentage of income but the Senate marginal votes wanted a “good” CBO score that did not start with “Trillion”

  9. 9
    Kelly says:


    Another incentive created by the ACA is for early retirees with IRA/retirement accounts to adjust their annual withdrawals so as to qualify for a larger subsidy.

    That’s what we’re doing.


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