Van de Water: Health Insurance Tax Part of Health Reform’s Carefully Designed Structure

In testimony today before a House Small Business subcommittee hearing, CBPP Senior Fellow Paul Van de Water explained how the health insurance tax — a fee on health insurance providers that is part of the Affordable Care Act (ACA) — will help to pay for extending health coverage to 27 million people and allow reform to move forward in a fiscally responsible way.  Here’s an excerpt:

The law specifies how much the fee is to raise each year; this total is apportioned among providers based on their share of the U.S. health insurance business. Over the 2014-2023 period, the fee will raise about $116 billion. . .

As with any excise tax, supply and demand will determine how the tax’s burden is ultimately split between providers and purchasers.  Insurers have recently turned in strong financial results and thus are well positioned to bear some of the tax. But a portion of the tax is likely to be passed on to consumers.  The Joint Committee on Taxation estimates that premiums subject to the fee will be 2 to 2½ percent higher than they would otherwise be.

That is only part of the story, however.  Health reform also contains many provisions that will slow the growth of premiums.  The new health insurance exchanges will increase competition among plans and create economies of scale.  Standardization of benefits and the prohibition of medical underwriting will reduce administrative costs.  The individual mandate, as well as the subsidies to help people purchase coverage, will bring more relatively healthy workers into the insurance pool.  Premium increases of 10 percent or more are subject to state or federal review, and insurers must provide rebates to their customers if they spend less than 80 percent of premiums on medical care.  The ACA also includes a large number of initiatives to identify and implement more efficient ways of delivering medical services.

All things considered, CBO estimates that health reform will slightly reduce premiums for employer-sponsored health insurance in the near term.

Click here for the full testimony.