Critical Condition

What CBO Doesn’t Score: Over $6.5 Billion Annual State Revenue At Risk

Now that Congress has reached the “end of the beginning” of the federal take-over of people’s access to medical services, please allow me to point out a cost that Congress has ignored.

According the the CBO’s score of the Senate health “reform,” H.R. 3590, the bill would insure 31 million more people. Accepting the CBO’s estimate (and ignoring the deeper question of who is uninsured, and for how long), 15 million of these newly insured will be enrolled in Medicaid and State Children’s Health Insurance Program (SCHIP). The CBO estimates that this will cost states $30 billion over the next ten years (Table 3, fn c.).

But there’s another cost to states that the CBO does not score: The lost revenue due to Medicaid “crowding out” private coverage, as well as an estimated 9 million people migrating from state-regulated health insurance to federally licensed exchanges. On average, states tax private health insurance 2 percent of premiums. For example, if a policy for a family costs $13,000, the state rakes in $260 straight off the top.

Revenue from premium taxes on health insurance can be a measurable factor in states’ budgets — about $6.5 billion in 2008 alone, generated from just under half a trillion dollars of premiums for state-regulated health insurance. These estimates result from Taxing Health Insurance: How Much do States Earn? a new study published earlier this week.

Taxing Health Insurance estimates that Nevada collected about $144 million in premium tax from health insurers in 2008. The state’s own Medicaid and SCHIP funding added up to $455 million. So these tax revenues accounted for almost one-third of the state’s spending on these huge government programs. Hawaii, New Mexico, South Dakota, and Georgia round out the five states at greatest risk from losing premium-tax revenue.

Until now, these figures have been absent from the debate on health reform. States bundle revenues from premium taxes on health insurers alongside those from premium taxes on other lines of insurance, such as homeowners, auto, and life; and report a consolidated figure. No official body breaks them out, but for insurance commissioners this may not matter.

Premium taxes are “profitable” in the sense that revenue from them is about 13 times greater than necessary to fund a state’s insurance department. However, the fact that 92 cents of every premium dollar flows straight into the general fund suggests that state residents should be very aware of how their state budgets will be attacked by so-called federal insurance “reform.”

— John R. Graham is director of Health Care Studies at the Pacific Research Institute.

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