Briefs & Reports

Report Examines Impacts of Imposing the ACA’s Health Insurance Tax on Medicaid Plans

The Affordable Care Act’s Health Insurance Tax (HIT) is set under current law to return in January 2018 after being suspended during 2017. This study assesses the indirect impacts on health care premiums in private markets, participation by consumers in those markets, and direct federal and state budget impacts resulting from the imposition of the HIT on state Medicaid programs. 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.

The main findings of the report are:

  1. 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.
  2. Of the $22 billion in additional premiums, $5.5 billion is attributable to Medicaid in 2018.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.

This report was prepared for UnitedHealth Group by HMA Senior Fellow Jack Meyer, PhD and Senior Consultant Andrew Fairgrieve.