For the past several years, the insurance industry has been urging Congress to eliminate three unpopular taxes that were designed to help pay for the Affordable Care Act. They finally listened… sort of. While the taxes have not been eliminated, the House and Senate did vote to postpone the Health Insurance Tax (HIT), the tax on High Cost Health Plans, better known as the Cadillac Tax, and the Durable Medical Equipment (DME) Tax. This was part of the January 22 deal to keep the government open for three weeks. The same bill also reauthorized the Children’s Health Insurance Plan (CHIP) for six years.
Health Insurance Tax
The Affordable Care Act also imposes a fee on insurance companies, or, as the IRS puts it, “each covered entity engaged in the business of providing health insurance for United States health risks.” The tax does not apply to self-insured employers, government entities, or certain nonprofit corporations.
The tax went into effect in 2013 with the first filings due by April 15, 2014. There was a one-year moratorium on the tax for 2017, but the Health Insurance Tax resumed January 1 of this year. Because it is a tax on insurance premiums, the HIT does have a direct impact on the amount that consumers pay for health insurance. In fact, some insurance companies are actually showing the amount of the total premium that is attributable to the tax on their quotes.
The January 22 deal provides a moratorium on the Health Insurance Tax for calendar year 2019, but does not eliminate the tax to be paid in 2018 on the 2017 data year.
The so-called Cadillac Tax was originally scheduled to go into effect this year but was previously postponed to 2020. Now we have two more years before we have to start worrying about it. The tax, which is unpopular among lawmakers on both sides of the aisle, would charge a 40 percent excise tax on employer-sponsored health coverage that exceeds certain thresholds.
Unfortunately, those threshold amounts are adjusted annually based on the consumer price index, not based on medical trend, so each year more and more employers would be subject to the tax, and the prevailing wisdom is that it would either cause employers to cut popular benefits like FSAs and worksite products or would lead to higher premiums for employees. Neither of those are desirable outcomes, which is why the insurance industry has been pushing back against the tax. At AHCP, we’re pleased with this two-year delay, but would like to see the tax eliminated altogether.
Durable Medical Equipment Tax
The tax on durable medical equipment, also known as the medical device tax, has been a big topic of debate ever since the Affordable Care Act was signed into law. As US News explains, the 2.3% excise tax applies to manufacturers and importers of pacemakers, prosthetics, and stents as well as advanced imaging technologies like X-rays, ultrasounds, MRIs, and CT scans. The IRS claims that the tax “generally does not apply to individual consumers,” but many argue that consumers will ultimately pay a higher price as a result of the tax.
The medical device tax went into effect in 2013, but Congress suspended the tax in 2016 and 2017. The tax resumed January 1 of this year, but the January 22 bill again postpones the tax for two years, and the suspension is retroactive to January 1. Absent another bill postponing or repealing the DME tax, it is now scheduled to resume January 1, 2020. The latest two-year delay, according to Stat News, “will cost the federal government about $3.7 billion during that time period.”
Chipping Away at the ACA
In addition to the ACA taxes that have been postponed, recent legislation, regulations, and executive orders have also eliminated the individual mandate penalty starting in 2018, shortened the open enrollment period in the individual market, cut advertising for Healthcare.gov by 90 percent, and halted reimbursements to insurance companies for the cost sharing reductions. We don’t yet know what the cumulative effect of all of these moves will be, but it’s clear from the premiums they’re charging that insurance companies are nervous about selling individual plans.
The hope, of course, is that there’s a method to their actions and that we might soon see a plan unveiled that will truly stabilize the individual market and encourage more insurers to offer coverage. This is an election year and congressional Republicans will certainly want to make good on their promise to replace the ACA. Democrats, on the other hand, will fight just as hard to keep it around. We’ll continue to monitor the situation and will let you know of any important changes.