posted by Paul Eiting
on May 25, 2016
What determines how much you pay in health insurance premiums? That’s a complicated question that involves a number of factors – the price of medical services and prescription drugs, the level of competition among local hospitals and physician groups, and the health of the population enrolled in coverage, among others. Another factor that receives less attention is the total amount of various taxes and fees paid by health insurance companies. We must understand these costs and aim to reduce or end these taxes and fees if we are to address the affordability of coverage.
All businesses pay federal and state taxes, and health plans are no different. Most health insurance companies pay an effective tax rate higher than 30 percent. There are also a number of taxes and fees that are specific to health insurance products and – like all taxes and fees on insurers – are built into premiums.
The health insurance tax is one example. Current law imposes a tax on health insurance purchased by families and small businesses. Studies by Oliver Wyman have found that, due to this tax, small employers will pay $210 more per employee and families will pay an extra $530 per year, on average. This tax also falls on Medicare Advantage coverage purchased by seniors as well as state Medicaid health plans.
A qualified health plan (QHP) offered in a federally-facilitated marketplace (FFM) is subject to a variety of fees. There are fees to fund the operations of the FFM, research to compare medical and drug treatments, and the ACA premium stabilization programs. For a small employer QHP in 2016, these fees plus the ACA health insurance tax added an average of $1,300 a year to family coverage.
These taxes and fees are in addition to the premium taxes that nearly all states have implemented on their own. The average state health insurance tax is 2.25 percent of premium, although the rates range from a low of 0 percent (Utah) to a high of 4.265 percent (Hawaii). Many states also tax the premiums of HMOs, at an average rate of 2 percent with some as high as 5.5 percent. These taxes are incorporated into the cost of health insurance coverage.
One way to slow rising premiums is to address these taxes and fees:
Health Insurance Tax: In the final days of the 2015 session, Congress passed major legislation that included a one-year suspension (in 2017) of the health insurance tax. By suspending the tax, Congress took an important step in providing relief to millions of consumers. Congress should provide additional relief for 2018 and beyond to provide real savings for seniors, small business owners, and middle-class families.
Marketplace User Fees: The federal government imposes a 3.5 percent user fee on health insurance premiums to operate the federally-facilitated marketplace. States that run their own marketplaces have similar fee structures. Federal and state governments should evaluate the costs of operating a marketplace, reduce administrative costs, and minimize user fee levels to mitigate this expense that is built into premiums.
All stakeholders – health insurance plans, providers, consumers, and government agencies – must play a role to improve the affordability of coverage. To reach this goal, we must explore ways to eliminate or reduce these taxes and fees that place upward pressure on premiums.
Paul Eiting is Policy Director at AHIP.