Obamacare Tax Delay Would Give Insurers a Win

Health insurers are set to lose when it comes to the year-end omnibus spending bill, but the industry will also score a win if a one-year Obamacare tax moratorium makes its way into a separate package of year-end tax provisions.

If lawmakers do nothing on the health insurance tax, it expected to bring in $12 billion or more annually to the Treasury in 2017 and 2018. But members are discussing a one-year suspension of the tax, which could keep some of that money with the insurers. They could, in theory, pass the savings along to their customers, but there is no requirement that they do so.

That’s the plus side for the industry. On the minus side, the omnibus is all but guaranteed to include a provision that requires Obamacare programs that help mitigate insurer risk to be budget neutral. That means taxpayer dollars can’t help insurers recoup their losses if they underestimate their risk on the public exchanges. Sen. Marco Rubio (R-Fla.) championed the provision last year, which ended up in the 2015 spending bill. The provision is expected to remain in place next year.

But the cost of a a one-year pause on Obamacare’s health insurer tax far outweighs the $2.5 billion that stayed in government coffers as a result of the flat-funded “risk corridor” program. The cost also would probably surpass any amount that insurers are likely to lose next year in uncompensated risk.

The tax on health insurers, informally known as “HIT,” was included in the Affordable Care Act to help pay for the expanded coverage. The ACA lays out specific amounts to be collected through the tax each year. Currently, Congress is negotiating suspending the tax in either 2017 or 2018, when it is scheduled to bring in $13.9 billion and $14.3 billion, respectively.

The risk corridor program was designed to help health insurers remain stable during the first few years on exchanges, when they had to guess about an enrollee’s health while setting premiums. Risk corridors redistribute money from plans that had lower than expected claims to those with higher than expected claims. In October, as a result of the Rubio budget-neutral requirement, the Centers for Medicare and Medicaid announced that insurers would only be getting 12.6 percent of the funding they requested for 2014, or $362 million of the requested $2.87 billion.

Republicans saw this as a victory for taxpayers.

“The American taxpayer should not be spending $2.5 billion to bail out a private insurance company. And if they’re not sustainable in the first year, they won’t be sustainable in the fifth,” Rubio said in an interview on “Meet the Press” on Sunday.

However, insurers argue that they did not fare well without the reimbursements. Shortly after the announcement, several nonprofit co-ops established under Obamacare joined the ranks of those that had shuttered earlier in the year. Although the lack of full risk corridor funding probably was not solely responsible for those closures, it likely put the final nail in the coffin.

Some insurers have done better than others on the exchanges. By design, the marketplaces are competitive, and some insurers have priced too low and experienced losses, while others set premiums more accurately. But overall, the risk corridor funding — which was originally designed, but not required, to be budget neutral — suggests that insurers have been struggling in the first years of Obamacare exchange implementation.

Premiums are also set to rise, on average, 7.5 percent in the 37 states using Healthcare.gov in 2016, although this amount varies drastically by location. Rates for the following year are released in the fall, so if HIT is suspended for 2017, this would be reflected in the fall of 2016, right before the presidential election.

“The latest budget proposals do nothing to address the recent funding shortfall with the risk corridors program or make up for the losses facing health plans in the exchanges. Health plans will continue to face instability in the market until Congress and the administration act to make sure the risk corridors program works as intended,” said Clare Krusing, spokeswoman for America’s Health Insurance Plans.

A suspension of HIT could help reduce the cost of insurance across the board. The total amount defined in Obamacare is paid by individual insurers based on market share. So, for example, if Insurer A has twice as many enrollees as Insurer B in 2017, it would pay twice as much toward the scheduled $13.9 billion, unless the tax is temporarily lifted for that year.

Insurers account for the tax in their rate filings each year, and it’s estimated that a repeal of the tax would generally lower premiums by between 2 and 3 percent. Insurers would likely be held accountable for passing savings onto consumers if the tax was suspended, because regulators would not allow insurers to account for it when they file rate requests, insurers say. But even so, most insurers would not be legally required to pass along greater savings to consumers.

“Removing the HIT should certainly lower premiums in the ACA marketplaces, marginally, although the tax itself was a very explicit piece of the legislative bargain with insurers in return for the increased customers that the ACA provided,” said Loren Adler, research director at the Center for a Responsible Federal Budget.

A delay of HIT would take away ACA revenues, and, if not offset, add to the federal deficit. Pausing the tax in 2017 would cost $12 billion. In 2018, that figure jumps to $12.5 billion, according to the Congressional Budget Office.

Congress is also highly likely to pass two-year delays of Obamacare’s Cadillac tax and medical device tax in the tax extenders package, regardless of whether negotiators strike a larger deal or extend current provisions.

Some worry the delays would have implications beyond adding to the deficit.

“Any delay will probably be based in the hope that the next Congress and administration will eliminate these taxes,  and the ACA, altogether,” said Tim Jost, a professor at the Washington and Lee University law school and a strong supporter of the ACA. “Of course, if Congress comes up with revenue replacements, the effect of the cuts would be minimal. But this Congress doesn’t seem to be concerned about revenue.”