Since the healthcare reform law known as the Affordable Care Act was passed nearly four years ago, the insurance industry was painted as a main beneficiary; true insurers would be landed with a new tax in 2014, but the law’s mandated insurance coverage meant millions of new customers for insurance companies — like Humana (NYSE:HUM), Aetna (NYSE:AET), and WellPoint (NYSE:WLP) — an overall win. Plus, new research from the actuarial firm Milliman shows insurers have found a way to lessen their tax burden.
Obamacare — as the healthcare reform is known colloquially — was designed to fill the last gap in insurance coverage, the gap left by the expansion of employer-sponsored health insurance amidst the wage freeze of World War II, and the legislation passed in 1965 as part of President Lyndon Johnson’s “Great Society,” a set of domestic programs that brought health insurance to the poor, older Americans, and the disabled. In the gap are the 48 million uninsured Americans who were excluded or priced out by the traditional system.
The Affordable Care made numerous tweaks to the insurance industry under the banner of fair coverage, including requiring insurers to provide a standard set of benefits, prohibiting insurers from excluding those with pre-existing conditions, and limiting the extent to which insurers vary premiums based on age. More importantly, individual exchanges were created to allow consumers to comparison-shop for health insurance policies in online marketplaces, which were designed to give individual customers collective bargaining power that will foster competition and drive down prices. Plus, eligible Americans are now able to qualify for subsidies for insurance policies.
Those changes did much to alter the insurance industry, especially in the eyes of the consumer. But those changes came at a cost. Many Americans who purchase insurance through the Obamacare exchange system will face higher premium costs if they are younger and healthier — meaning cheaper to insure — than the average exchange enrollee. Cheaper to insure insurance customers are needed to offset the older and sicker people, who are more likely to find exchange policies more affordable than the plans that were previously available. Yet, exchange risk pools must be broad enough to balance out the proportionally higher medical costs of the sicker and older individuals who will likely be among the first to sign up.
Partly to ensure healthcare is affordable to most Americans, and partly to ensure younger individuals purchase insurance, so insurance premiums will be subsidized for certain enrollees. To fund the tax credits, the federal government will distribute to subsidize the cost of health insurance for those Americans earning between 138 percent and 400 percent of the federal poverty level — a income bracket that may include as many 17 million individuals — the federal government has to boost tax revenues by $1 trillion over the next ten years.
Among the dozen or so new taxes, or tax increases, created by the law is industry-wide tariff for health insurers, which is based on U.S. market share. As U.S. Senator Charles Schumer of New York described it during the 2009 debate over the healthcare reform law, the tax was included to ensure health insurance companies pay their “fair share.” After all, insurers offering plans on the exchanges were theoretically going to benefit from the millions of new customers purchasing insurance thanks to the taxpayer-funded subsidies created by Obamacare, and they should therefore help fund those subsidies. But, according to research from Milliman, insurers have found a way for taxpayers to support more of the subsidies while they pay less.
The tax levied on health insurers was to amount to $150 billion over ten years, or about 2 percent of premiums. But a strategy insurers are beginning to employ could lower that tax bill considerably. The actuarial firm found the insurance industry is pushing to include some of its tax costs in the amount they spend on Medicaid programs for poor Americans, which are jointly funded by state and federal governments. The inclusion of tax costs along with Medicaid costs means insurance companies are shifting at least part of their tax burden to the average taxpayer, whose dues support entitlement programs like Medicaid. Milliman reported that the strategy may add between $36 billion and $39 billion to the cost of Medicaid over the next decade, with the size of the increase depending on how quickly the program expands. Correspondingly, Medicaid payments will rise approximately 1.6 percent per year starting in 2015.
This tax shift is “one of the awkward little complexities of the law that are only now coming to light,” Chief Executive Officer Dan Mendelson of the consultancy firm Avalere Health told Bloomberg. “It’s unusual.” But insurers that manage Medicaid plans argue that cost should be shifted, and as the publication noted, the states seem willing to comply. Thirty-seven states outsource at least some of their medicaid coverage to private insurance companies, and those companies have some leverage because federal regulations require states to pay “actuarially sound” fees to those companies managing Medicaid plans so that the poor receive adequate coverage.
“The states are really understanding the need for a viable program required this fee to be passed on,” WellPoint CEO Joseph Swedish explained on the company’s late January post-earnings conference call. WellPoint is the insurance company with the biggest Medicaid enrollment. “They understand the need for a sustainable Medicaid program, and this is part of sustainability,” he added. For some insurers, shifting the tax burden is “critical” for 2014 profits, Stifel Nicolaus analyst Thomas Carroll told Bloomberg. “The good news is that nominally most states recognize that it needs to be an element of the rate,” he explained in the interview. “Medicaid has always been a low-margin business.” Costing about 2 percent of premiums, the tax equals the average percentage increase in Medicaid, according to the analyst.
But as Aetna CEO Shawn Guertin described, that shift creates a “very circular” chain of events: the federal government raises money to fund insurance subsidies by taxing health insurers and then returns a portion of its tax revenue to those insurers managing Medicaid plans.
While Carroll told Bloomberg that the health insurer tax “doesn’t make any sense to be levied” on the Medicaid health management organizations, Avalere Health’s Mendelson believes the overall benefits of the healthcare reform should be taken into account as well. The Affordable Care Act may increase Medicaid costs, but it also “means now it’s possible for a person with diabetes in this country to get insurance,” he told the publication. “It’s not fair to look at any one of these effects in isolation.”
Of course, the tax is expected to impact insurance premiums by as much as 2.5 percent as well. A May 2012 letter to Senator Tom Coburn from the Joint Committee On Taxation noted that the tax “increases costs for affected health insurance providers and may be passed on to consumers in the form of higher prices.” That committee found that the tax will add $350 to $400 per year to the average family premium if the entire tax is passed onto consumers.
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