Insurance premium tax could net state extra $20 million per year under "private option" | Arkansas Blog

Monday, March 4, 2013

Insurance premium tax could net state extra $20 million per year under "private option"

Posted By on Mon, Mar 4, 2013 at 10:37 PM

While Republican lawmakers are out singing the praises of the new "private option," an awkward problem remains for the gang that's been howling about cost concerns: the new plan will probably cost taxpayers more.

A Republican legislator suggested to me one source of revenue unique to the "private option" that would help the state's bottom line: the insurance premium tax. Policies sold on the exchange are subject to a 2.5 percent tax that insurance companies pay to the state. Revenues from this tax are a key part of making the exchange self-sustaining. While in theory those costs would be passed on to consumers, most consumers will be protected from premium increases by the ACA’s regulation of price variation on the exchange and subsidies to help people between 100 and 400 percent of the poverty line.

What happens if we suddenly add more than 200,000 people to the exchange? Happy news for private insurance companies, but they'll be paying that 2.5 percent tax on each policy premium. Insurance Department Commissioner Jay Bradford said that state officials had gotten multiple assurances in writing from HHS that the 2.5 percent tax would be applicable to the new pool of folks on the exchange under the new plan. (Note that these consumers would be completely protected from premium hikes since the government pays the full premium.)

Since the exchange already planned to use tens of millions in federal grants and existing premium fees to meet the ACA's requirement that it be self-sustaining, the influx of new fees from the insurance companies selling to the expansion pool will likely create a surplus.

Exchange Director Cynthia Crone cautioned that adding hundreds of thousands to the exchange would "not be totally budget neutral" from a cost standpoint. There may be new expenses for outreach, I.T., or administrative costs and she said it's "too early to know all the answers." But she said the exchange has lots of fixed costs and the marginal cost of adding new folks will likely be relatively low.

Bradford said he that he expected additional costs from potentially doubling the pool on the exchange to be small compared to the revenue coming in from the premium tax. He expects the revenue to generate a significant surplus, which would then go in to general revenue.

"Depending how fast it wraps up, ultimately it could be over $20 million [per year]," he said. "That's when it's mature. It's not going to happen over night. But we'll be on a track."

This doesn't change the fact that a scheme using private insurance instead of Medicaid is likely going to be more costly. The Republicans' expansion plan is almost surely going to soak the feds. And in terms of the 2.5 percent tax, if insurance companies are able to pass on this cost, it will be to the government, which is footing the bill.

But there are already savings to the state bottom line that make it a good deal. This appears to be another source of revenue that offsets the cost when the state has to pitch in down the road.

*UPDATE: Forgot to include a key point: I didn't ask anyone about this, but I assume the 3.5 percent fee that the feds are charging for partnering on the exchange will also apply. If so, that would be offsetting revenue for the feds unless/until Arkansas decides to go with a state-run exchange and that fee disappears.

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