BEYOND THE NUMBERS
Delaying Health Insurance Tax Would Give Windfall to Insurers, Do Little to Reduce Premiums
Health insurers continue to lobby for repealing or suspending the fee on health insurance providers — also known as the health insurance tax, enacted to help pay for health reform — before the end of the year. Policymakers suspended the tax for 2017, but the industry is pushing to suspend it again or repeal it, claiming it would help make coverage more affordable. But that would be a very inefficient approach, and other policies would do much more to limit premiums in the individual insurance market, where premiums have risen the most. Moreover, suspending the tax for another year or two would provide a massive windfall to insurers, with little or no benefit for individual market consumers.
The health insurance tax is an annual fee on most businesses that sell private health coverage to individuals and employers, as well as most insurers that provide coverage through Medicare Advantage, Medicare Part D, Medicaid managed care, or the Federal Employees Health Benefits Program. The fee is similar to an excise tax on the sale of health insurance contracts. The law specifies how much the fee will rise each year; this total is apportioned among providers based on their share of health insurance premiums collected during the previous year. The tax took effect in 2014 but is temporarily suspended for 2017.
Further suspending or permanently repealing the tax would be an expensive, poorly targeted, and inefficient way to reduce premiums in the individual market. Suspending it in 2018 would cost about $14 billion but would have no effect on individual market premiums next year, since insurers have already set premiums for 2018. It would thus represent a windfall to highly profitable insurers. Even suspending the tax in 2019 could have little effect on premiums that year. Because insurers’ tax liability in 2019 will depend on their volume of business in 2018, they may have little incentive to pass the savings from a 2019 moratorium through to consumers in the form of lower premiums.
Permanently repealing the tax would cost about $145 billion from 2018 through 2027, but only about 10 percent of this amount would go to insurers in the individual market. Employer-sponsored insurance, Medicare Advantage plans, and other types of insurance would receive most of the benefit, even though premium growth in those markets has generally been modest. Repealing the tax would reduce individual market premiums by less than 3 percent, according to industry-sponsored estimates. Other policies, such as a permanent reinsurance program or increases in federal premium tax credits, would do much more to make individual market coverage more affordable at much lower cost.
Pay-as-you-go (or PAYGO) rules would require the President and Congress to offset the cost of suspending or repealing the tax by raising other taxes or reducing mandatory spending; one likely target of policymakers would be Affordable Care Act (ACA) provisions that expand health coverage to millions more Americans. For example, the Republican push to include damaging ACA cuts has so far derailed legislation to extend funding for the Children’s Health Insurance Program despite bipartisan, bicameral agreement on such an extension. Repealing the tax would also encourage efforts to repeal other ACA revenue-raising provisions, which in turn would require still more painful offsets. Even if policymakers exempted these tax changes from the PAYGO rules, suspending or repealing the health insurance tax and other ACA taxes would increase budget deficits and fuel pressures to cut health spending later.