A new federally mandated tax on health insurers will increase costs for state Medicaid programs and Medicaid health plans.

In an excellent new report, PPACA Health Insurer Fee Estimated Impact on State Medicaid Programs and Medicaid Health Plans, Milliman, retained by the Medicaid Health Plans of America (MHPA), conducted an independent analysis of the new federal health insurer fee’s effect on state Medicaid programs and Medicaid health plans.  The new tax is one of many enacted to help finance the Patient Protection and Affordable Care Act (PPACA or ACA).

Under PPACA, the health insurance industry will pay a nondeductible $8 billion fee, or excise tax, annually beginning in 2014. This tax is slated to rise to $14.3 billion in 2018, with subsequent growth to follow. Allocation of the tax is determined by the qualifying insurers’ prior year market share. Dual eligible plans and nonprofit insurers with Medicaid premium revenue exceeding 80 percent are exempt.

The PPACA health insurer fee will impact state Medicaid managed care rates because it will not be tax deductible. The Milliman report, therefore, recommends each state’s Medicaid managed care rates include two costs:

  1. An allowance covering the PPACA health insurer fee on Medicaid health plans in the states.
  2. An allowance covering increased federal tax incurred as a result of additional premium revenue to cover the health insurer fee.

The report further defines the parties responsible for premium funding along with the potential for a serious competitive imbalance among nonprofit and for-profit Medicaid managed care organizations (MCOs).

Nationally, financial impact of the PPACA fee on Medicaid managed care premiums is estimated between 1.5 percent and 1.6 percent. Some states may see premiums rise by up to 2.5 percent, exceeding average Medicaid premium increases of one to two percent. Milliman‘s report also detailed projects for the resulting state and local government funding requirements over the course of 10 years.

To read or download the full report, click here  (PDF).