A report from actuarial firm Milliman, Inc. and commissioned by Medicaid Health Plans of America shows a provision of the Affordable Care Act intended to tax health insurance companies to help fund health reform, will drain $13.6 billion from those states that use integrated risk-based models to care for their neediest residents.

The report, "ACA Health Insurer Fee: Estimated Impact on State Medicaid Programs and Medicaid Health Plans," an update of Milliman's 2012 study that takes into account new state Medicaid expansion decisions, shows that the health insurer fee (a.k.a. the health insurance tax), along with additional taxes paid due to the non-deductibility of the fee, will cost the Medicaid program $37.7 billion over the ten year period 2014-2023 according to a moderate growth scenario. This will cost the states about $13.6 billion and the federal Medicaid program about $24.1 billion due to the state-federal Medicaid matching formula.

States and the federal government end up paying for the tax due to actuarial soundness requirements. As an important consumer protection, the Balanced Budget Act of 1997 and implementing regulations require Medicaid managed care payment rates to be actuarially sound, inclusive of medical costs, administrative costs, taxes and fees.  So according to federal law, the insurance tax must be paid by the state and federal governments through higher payments provided to plans, and results in the federal government taxing states and itself.

It is important to note that the ACA includes a provision that specifically exempts Medicaid managed care plans from paying the insurance tax. Unfortunately, Congress limited the exemption to those entities with a tax status of "non-profit."  Even though both non-profit and for-profit plans offer exceptional services to the poorest patients in a state, only the non-profit plans are exempt. This results in the tax not being uniformly applied, affecting Medicaid beneficiaries and the states in an uneven fashion.

"It is apparent now more than ever: the health insurance tax is an ill-conceived method to finance the ACA and it will be on the shoulders of our country's sickest and poorest," noted Jeff Myers, MHPA's president and CEO. "It drives up costs for commercial consumers, it burdens states that already have exploding Medicaid budgets, it further exacerbates the cost curve for the federal share of Medicaid by $24.1 billion, and it creates a dynamic that limits options for Medicaid beneficiaries via reduced access to services and benefits. Myers added, "Currently, 37 Medicaid programs and theDistrict of Columbia use health plans to provide capitated risk-based health coverage for poor children, pregnant women, the elderly, and the disabled, so the harmful upshot of this tax will be felt far and wide."