Using Behavioral Economics to Understand Premium Tax Credit Reconciliation

The Affordable Care Act provides advanced premium tax credits to millions of Americans to help with the cost of purchasing private health insurance on the new health insurance marketplaces. The amount of subsidy a family qualifies for is based on their projected income for the year ahead. However, since income is fairly unpredictable, some families end up qualifying for a larger tax credit when they do their taxes, while others end up with a smaller credit and must repay what they received throughout the year. In the first year of this reconciliation process, half of those who received advanced premium tax credits had to pay at least a part back. This outcome is consistent with recent literature in behavioral economics, which explores psychological, social, and cognitive influences on decision-making. This paper explores the reconciliation problem and possible approaches to reducing or eliminating it.