ACA Tax on Health Insurers Will Cost States Billions: Milliman Report

The actuaries at Milliman, Inc., a firm specializing in projections of health care costs, estimate that the excise tax on health insurance premiums established by the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) and amended by the Health Care and Reconciliation Act (HCERA) (P.L. 111-152) will cost state and federal government between $36.4 billion and $39.3 billion during the first ten years, according to a report prepared for Medicaid Health Plans of America. released on February 12, 2014. The precise amount will vary depending on several factors, including the number of states that choose to expand Medicaid, the provisions of regulations that have not been issued or may be amended, the extent to which actual experience conforms to Milliman’s assumptions about expansion, and the rate at which newly eligible beneficiaries take up Medicaid coverage.

Entities Subject to the Fee

The statute sets the total amount of excise taxes, or fees, to be collected each year. The amount due from each health insurer is determined based on its share of the market. The law and regulations provide for exemptions for: (1) nonprofit insurers that receive at least 80 percent of their revenue from Medicare, Medicaid, dual eligible, or Children’s Health Insurance Program (CHIP) payments; (2) 50 percent of the revenue of insurers organized as nonprofit entities under Internal Revenue Code sec. 501; and (3) plans operated by government entities. Entities under common control are considered one entity for purposes of the tax. If the parent corporation has both for-profit and not-for-profit subsidiaries, the revenue subject to the fee is based upon the proportion of the nonprofit’s revenue to the parent’s total revenue. Entities that offer other lines of business pay the fee only on the portion of their revenue derived from health insurance premiums. Insurers with revenue below a stated threshold also are not required to pay the fee.

Why States Will Pay

State Medicaid agencies pay premiums to Medicaid managed care organizations (MCOs) in the form of capitated monthly payments. The payments must be “actuarially sound,” defined in 42 CFR sec. 438.6 as: (1) developed in accordance with actuarial principles; (2) appropriate to the population to be covered and the services to be furnished; and (3) certified by a member of the American Academy of Actuaries to be consistent with the practice standards established by its Actuarial Standards Board (ASB). According to Milliman, the ASB has no practice standards that apply to this certification, although other practice standards, for example, for data quality, apply to portions of the work. The ASB has published only a nonbinding “practice note,” which states that the projected revenue from all sources should be sufficient to provide for “reasonable, appropriate, and attainable costs,” including administrative expenses, taxes and government assessments, and the cost of capital.

In other words, when the MCO’s costs increase, the capitated payments should increase to cover them. Milliman noted that the average profit for commercial MCOs is 2 percent, so that the additional fee would have a significant impact. Because the fee is not deductible for purposes of federal income tax, Milliman says, the MCO would be paying tax on money it doesn’t actually get to keep. Therefore, the capitated payments also should cover the corporate income tax on the fee. Milliman estimated that capitated payments should increase by $1.54 for each dollar paid in fees. Milliman concluded that the federal fee owed by Medicaid MCOs will be paid by the federal and state governments and have no effect at all on the MCOs’ bottom lines.

Amount of State Payments

To the extent that the premiums are paid for the Medicaid beneficiaries newly eligible under expansion, the state’s net payment would not increase immediately because the federal government will pay 100 percent of the costs. When the federal contribution levels off to 90 percent, the state share of the increase would be 10 percent. However, 30 states already pay managed care organizations to cover some part or all of their existing Medicaid beneficiaries. The federal government would contribute only its ordinary match toward those expenses. Milliman estimated that the average federal match is 66 percent, so that the state’s share of each dollar would average 34 cents.

The authors also estimated the share of each state based on its federal match. Although the national average increase to state Medicaid budgets was 1.6 percent, the increase for particular states ranged from 0.1 percent to 2.8 percent.

Milliman did not attempt to identify the premiums paid to Medicaid MCOs that are paid either to for-profit entities or to entities who are partially or completely excused from the fee obligation.