Sweeping repeal and replace legislation may be slowed, but does not mean significant healthcare changes are not coming off the legislative wish list. The debate on funding aspects of the healthcare law will likely continue through the 2018 election. The Health Insurance Tax (HIT) comes up for discussion and two organizations presented their takes on HIT’s impact on Medicare programs and payers.
Better Medicare Alliance Position
From the policy position paper prepared by the Better Medicare Alliance, “The Patient Protection and Affordable Care Act (ACA) imposed an annual tax on health insurance premiums. The tax applies to individual policies, small groups, employers that are not self-insured, Medicaid managed care, Medicare Part D, and Medicare Advantage. The $8 billion tax was first levied in 2014, and grows every year by the rate of growth in premiums. To prevent premium increases, the HIT was suspended for 2017. The HIT is scheduled to be reinstated in 2018 and is expected to rise to $14.3 billion.”
Key Points
- The ACA imposed a multi-billion-dollar annual tax on health insurance that is likely to increase premiums or cost-sharing for Medicare advantage beneficiaries.
- Over 20% of the HIT falls on Medicare Advantage and Part D plans.
- Congress suspended the tax for 2017.
- The HIT is scheduled to be reinstated for 2018.
- As a result, beneficiaries’ premiums could increase by an estimated 2.6% in 2018.
- Better Medicare Alliance urges Congress to suspend the tax for 2018 and to repeal the HIT in future years to protect Medicare Advantage beneficiaries.
UnitedHealth Group Study
Results of a study commissioned for the UnitedHealth Group to estimate the order of magnitude of the public-to-private cost-shift arising from the ACA’s Health Insurance Tax (HIT).
This study highlights the distinction between the initial application of a tax and its actual impacts. While it begins as a tax on health insurers, this tax ends up being paid for by states, the federal government, employers, and employees. The key to the model is the estimation of the public-to-private sector cost-shift that would occur as states and the federal government incur added Medicaid spending due to the HIT.
Health Insurance Tax
The main findings of the report are:
- Under current law, the moratorium on the Health Insurance Tax will lapse in 2018 and the tax on health insurance will be reinstated for 2018 at a higher annual level ($14.3 billion). The tax on health insurance, however, is not a deductible business expense for federal tax purposes. Therefore, insurers must collect $22.0 billion in premiums to generate this $14.3 billion, reflecting the 35% corporate income tax rate.
- Of the $22 billion in additional premiums, $5.5 billion is attributable to Medicaid in 2018.
- Taxes imposed on health insurers are an allowable cost in calculating how much Medicaid must pay insurers participating in Medicaid. Therefore, while the $5.5 billion is initially paid for by insurers, the actual burden of this tax will fall on states and the federal government, which share the costs of Medicaid. To a substantial degree, the government is taxing itself.
- At the national level, $3.16 billion of this new government cost will be borne by the federal government and $2.38 billion directly by the states in 2018. The federal government will bear $31.71 billion and the states will bear $23.92 billion due to the HIT over 10 years. This is based on an average federal Medicaid matching rate of 57%. For our state-by-state estimates, we used the actual federal matching rate for each state.
- While insurers must collect $22 billion in premiums to pay the $14.3 billion HIT in 2018, the federal government ultimately will realize a net gain of approximately $11 billion from the HIT in 2018 due to two key offsets: first, the federal government is paying itself in meeting its federal matching rate requirements for Medicaid; and second, the federal government will incur a tax revenue loss due to the downstream effects of the public-to-private sector cost-shift that result in a decline in taxable wages and salaries.
- States may take a combination of actions in response to higher-than-expected costs (or lower-than-expected revenues), including: 1) a reduction in payments to hospitals, physicians, and other providers; 2) a reduction in optional services under Medicaid; or 3) reductions in spending in other parts of their budgets or increases in taxes.
- As states reduce payments to hospitals, those hospitals will try to shift that burden onto private payers. Our review of published research found estimates of about 20% to about 50% for the proportion of public sector health spending shortfalls that would be shifted to the private sector. Using these figures, we projected “low” and “high” estimates of the amount of the cost-shift.
- Under the high cost-shift scenario, the Medicaid premium cost-shift would result in more than 36,500 privately insured individuals losing coverage, with average per capita premium costs rising by $19 and total private sector premiums increasing by $2.66 billion in 2018.
- Under the low cost-shift scenario, more than 14,000 privately insured individuals would lose health coverage, average per capita premiums would rise by $7, and total private sector premiums would increase by $1.06 billion in 2018.
- Federal tax revenue would decline by $337.3 million in 2018 and by $3.34 billion over 10 years under the high cost-shift scenario. The corresponding figures for the low cost-shift scenario are $134.9 million in 2018 and $1.34 billion over 10 years.
- State tax revenue would decline by $168.7 million in 2018 and by $1.67 billion over 10 years under the high cost-shift scenario and $67.5 million in 2018 and $668.9 million over 10 years under the low cost-shift scenario.
- After presenting our national estimates, we present state-by-state results for states with active Medicaid managed care programs at the time of this analysis.
