Lose your health insurance, lose your doctor, and lose money. Forget the mandates, regulations, bureaucracies, and spending explosion, there is a single policy tucked into the Affordable Care Act (ACA) that manages the unholy trifecta on its own.
A new American Action Forum Study examines a “fee” imposed by the ACA on the health-insurance industry with the intent of raising nearly $80 billion over the first five years, beginning with $8 billion in 2014 and rising thereafter. The aggregate fee is then apportioned among the insurers based on their shares of the total affected premiums. More sales means more premiums and a bigger share of premiums means more fees. For an insurance company this is a de facto tax on insurance premiums.
Now the mischief begins. A tax applied equally has well known problems, but the ACA’s premium tax creates an uneven playing field, and it’s littered with victims. Taxable insurers get hammered the hardest. The ACA specifically forbids deducting the cost of the premium tax when computing corporation-income tax. As a result, if an insurance company pays for $1 of premium taxes by raising premiums and cannot deduct the premium tax, it will pay another $0.35 in corporate-income taxes. Accordingly, the impact on the insurer is $0.65 in net revenue minus the $1 fee. Bottom line: a loss of $0.35. The punitive tax-on-a-tax means that insurers must raise their premiums by $1.54 simply to pay both taxes and stay afloat.
In contrast, non-taxable insurers can achieve the same result by raising premiums by only $1. That’s an unfair competitive edge, but it gets worse. The ACA exempts entirely from the premium tax a non-profit (but not a for-profit) firm that earns 80 percent or more of its gross revenue from government programs for the low-income, elderly, or disabled. Here the drafters clearly picked a winner: These particular organizations will face no tax and no need to change premiums.
The tax-driven dynamics are inevitable. Purchasers shopping for cheaper policies will be driven to shift from existing insurance to cheaper options. Firms struggling to manage the tax-based disadvantages will have incentives to re-organize to avoid tax and degrade insurance quality to keep premiums down. Adjusting to the tax will produce churn and disarray in the marketplace.
The real losers will be families. The insurance arrangements they liked and chose will be exchanged for tax-driven insurance that reflect those favored and punished by the tax. Goodbye insurance.
When they lose their existing insurance, there is a good chance they will have to change their network of providers in the bargain. Goodbye doctor.
The damage to families is a consequence of the drafters’ evident desire to punish some insurers, favor others, and make insurers foot part of the bill for the ACA. The ultimate irony is that a basic lesson of tax policy is that people pay taxes; firms do not. Firms may send tax payments to the Treasury, but they can only get those resources from somebody in the economy. Accordingly, the economic burden of the $78.2 billion in premium taxes must be borne by individuals.
Who? The most likely answer is their customers, with obvious and unambiguously negative implications when buying an individual policy. If, instead, a family gets insurance through an employer, they suffer as firms shave back on cash-wage increases. Goodbye summer camps for the kids, vacation, or even making ends meet.
In particular, goodbye middle-class money. The data suggest that roughly 85 percent of the burden will come out of the wallets of those making less than $100,000.
As the political winds blow, some will favor repeal of the premium tax along with the rest of the ACA. And others will want to keep the ACA but recognize the need to fix a tax that is badly broken. But everyone should recognize the status quo disrupts insurance, disrupts health care, and hurts the middle class.