Obamacare’s Fraud Prevention Program Plagued with Implementation Problems

IG report reveals manifold issues with IRS’s implementation of new fraud detection system

August 26, 2013

The IRS’s new fraud prevention program, planned for use with Obamacare, has been plagued with implementation problems, according to a Treasury Inspector General for Tax Administration report.

The report, released Monday, outlined several problems with how the IRS implemented the new Return Review Program (RRP), including improper vetting of the RRP’s initial prototypes, poor communication during the initial development, and unclear management rules.

The report comes as the Obama administration has delayed the verification requirement for subsidies and healthcare experts have raised concerns about the risk of fraud and waste under the law.

The IRS is developing a new fraud-prevention program because the current system is outdated and will be completely obsolete by the end of 2015, according to the report.

The new fraud detection system is currently scheduled for deployment in early 2015 to process individual tax returns from 2014, when the first tax returns with Obamacare subsidies will be submitted.

The subsidies to help qualifying individuals purchase health insurance on the Obamacare health insurance exchanges are being implemented through the IRS, meaning those who receive a subsidy will include it on their tax return.

The IRS agreed with all of the problems identified in the report and has taken steps to rectify many of them, although some problems, like improper vetting and comparison of the prototype with other options, are impossible to fix at this point.

The report did not indicate whether the RRP was on track to be implemented in time to process the 2014 tax returns.

"The IRS is putting in place a number of strong steps and system safeguards to ensure accurate and proper claims," said an IRS spokesman.

The Obama administration has delayed several parts of the law, including the mandate that employers provide health insurance and the requirement that states verify whether everyone who applies for a subsidy is eligible for one.

The House Ways and Means Committee held a hearing on Aug. 1 examining the law’s readiness for implementation, and the IRS Acting Commissioner Daniel Werfel defended the administration’s safeguards for preventing fraud and waste.

Healthcare experts are raising concerns about the risks of fraud and waste despite the administration’s assurances.

"Obamacare, especially given some of President Obama's arbitrary administrative postponements, is going to be a scammer’s paradise initially, and may be for years to come," said Merrill Matthews, a healthcare policy expert at the Institute for Policy Innovation.

When asked about the risk of fraud, Sally Pipes, president of the Pacific Research Institute, said, "I think it’s going to be quite large, in particular because of the delay in the verification of income in order to be eligible for subsidies."

Pipes also noted that the huge number of "navigators" to help people sign up for insurance also pose a threat for fraud and waste.

James Capretta, a healthcare policy expert at the Ethics and Public Policy Expert, compared the risk for fraud and waste in Obamacare to the problems posed by the Earned Income Tax Credit (EITC).

"It’s had a long, long history of mispayments being made by the Treasury to the filers because of complexity sometimes, because of purposeful fraud, but a lot of times because of waste and not properly calculated payments being made," Capretta said.

He noted that the IRS has had over two decades to create systems to stop fraud for the EITC, which is a less complex program than Obamacare.

"None of those systems are really going to be up in Obamacare," he said.