Patient Protection and Affordable Care Act:
Annual Fee on Health Insurers
Suzanne M. Kirchhoff
Analyst in Health Care Financing
September 13, 2013
Congressional Research Service
7-5700
www.crs.gov
R43225
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Patient Protection and Affordable Care Act: Annual Fee on Health Insurers
Summary
The Patient Protection and Affordable Care Act (P.L. 111-148) and the Reconciliation Act of 2010
(P.L. 111-152) impose an annual fee on certain for-profit health insurers, starting in 2014. The
aggregate amount of the ACA fee, to be collected across all covered insurers, will be $8.0 billion
in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017, and $14.3 billion in 2018. After
2018, the aggregate fee will be indexed to the overall rate of annual premium growth, as
calculated by the Internal Revenue Service.
The annual fee will be apportioned among health insurers, based on (1) their market share and (2)
their dollar value of business. The fee applies to net health care premiums written, which are
defined in regulations as gross premiums from insurance sales minus refunds to enrollees under
the medical loss ratio provisions of the ACA, certain commissions, and premiums ceded to
reinsurers. Ceded premiums are premiums that an insurer transfers to a reinsurer, as payment for
protection against defined market risks.
The ACA fee does not apply to the first $25 million of net premiums written by a covered insurer.
The fee will be imposed on 50% of net premiums written above $25 million and up to $50
million, and 100% of net premiums in excess of $50 million. The regulations shield a higher level
of net premiums from the fee for insurers that are exempt from federal taxes and are considered to
be public charities, social welfare organizations, high-risk health insurance pools, or consumer-
operated-and-oriented health plans (COOP).
The ACA fee does not apply to entities that fully self-insure, government-run insurance programs,
or non-profit insurers incorporated under state law that receive more than 80% of their gross
revenues from government programs that target low-income, elderly, or disabled populations
(such as the State Children’s Health Insurance Plan [CHIP], Medicare, and Medicaid).
Some insurance issuers have informed shareholders and state insurance regulators that they intend
to pass on the cost of the fee to businesses and enrollees in the form of higher premiums. Private
insurers that contract with government organizations to provide Medicare and Medicaid health
benefits will be subject to the fee, which could have implications for enrollee premiums and
government payments to those plans. It is difficult to estimate the precise impact of the fee on the
insurance industry, government programs, and consumers for several reasons, including a lack of
public data on net premiums written. In addition, insurers’ ability to pass on the fee will vary
depending on competition in local markets, and their individual financial strategies.
Congressional Research Service
Patient Protection and Affordable Care Act: Annual Fee on Health Insurers
Contents
Annual Fee on Health Insurers ........................................................................................................ 1
Insurers Subject to the ACA Fee................................................................................................ 1
Benefits Covered by the Fee ...................................................................................................... 2
Fee Calculation .......................................................................................................................... 3
Insurer Reporting Requirements ................................................................................................ 4
Penalties for Non-compliance ................................................................................................... 5
Deductibility .............................................................................................................................. 5
Impact of the Annual Premium Fee ................................................................................................. 5
Breakdown of the Premium Fee ...................................................................................................... 7
Interaction of the ACA Tax and Other Provisions ..................................................................... 8
Issues for Congress .......................................................................................................................... 9
Medicaid ............................................................................................................................ 10
Graduate Medical Education ............................................................................................. 10
Tax Treatment of Recovered Fees ..................................................................................... 11
Tables
Table 1. Annual ACA Fee of Health Insurance Premiums ............................................................... 1
Contacts
Author Contact Information........................................................................................................... 11
Congressional Research Service
Patient Protection and Affordable Care Act: Annual Fee on Health Insurers
Annual Fee on Health Insurers
The Patient Protection and Affordable Care Act (ACA, P.L. 111-148)1 and the Reconciliation Act
of 2010 (P.L. 111-152) impose a fee on certain for-profit health insurers, starting in 2014. The
aggregate ACA fee, to be collected by the Internal Revenue Service (IRS) across all affected
insurers operating in the United States, is set at $8.0 billion in 2014.2 The fee will gradually rise
to $14.3 billion in 2018, and will be indexed to the annual rate of U.S. premium growth
thereafter3 (Table 1).
Table 1. Annual ACA Fee of Health Insurance Premiums
Annual Fee Imposed on All Affected Insurers
Year Aggregate
Fee
2014
$8.0
billion
2015 $11.3
billion
2016 $11.3
billion
2017 $13.9
billion
2018 $14.3
billion
Previous year’s total increased by annual rate
2019 on
of premium growth, as calculated by IRS.
Source: Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57, Federal Register, March 4,
2013.
Insurers Subject to the ACA Fee
Under proposed IRS regulations, entities subject to the ACA fee generally include health
insurance issuers such as an insurance company, insurance service, or insurance organization
(foreign or domestic) that are required to have a state license and are subject to the laws of such
jurisdictions that regulate health insurance. Covered entities may include health maintenance
organizations, multiple employer welfare arrangements4 (MEWA) that are not fully insured, and
1 The insurance premium tax provision is found in Sec. 9010 of the ACA and Section 1406 of the Reconciliation Act.
2 The ACA imposes other fees on the insurance industry, including the (1) transitional reinsurance program, (Section
1346); (2) excise tax on high-value plans (Section 9001); and (3) Patient Centered Outcomes Research Institute
(PCORI) fee (Section 6301). These fees are outside the scope of this report.
3 See Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57,
Federal Register, p. 14034 -14046, March 4, 2013, https://federalregister.gov/a/2013-04836; and Department of the
Treasury, Internal Revenue Service, “Health Insurance Providers Fee; Correction,” 26 CFR Part 57, Federal Register,
p. 17612, March 22, 2013, http://www.gpo.gov/fdsys/pkg/FR-2013-03-22/pdf/2013-06701.pdf. The regulations state
that the IRS will determine overall net premiums written based on reports submitted by covered insurers and “any other
source of information available to the IRS.”
4 Multiple employer welfare arrangements (MEWA) provide health and welfare benefits to employees of two or more
unrelated employers that are not parties to bona fide collective bargaining agreements. MEWAs are designed to give
small employers access to low cost health coverage on terms similar to large employers.” See Department of Labor,
“Fact Sheet: MEWA Enforcement,” March 2013, http://www.dol.gov/ebsa/newsroom/fsMEWAenforcement.html.
Under the proposed IRS regulations, the fee will apply to MEWAs that are not fully insured, whether or not they are
subject to regulation under state insurance law. The fee will apply to the extent that a MEWA uses enrollee premiums
(continued...)
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Patient Protection and Affordable Care Act: Annual Fee on Health Insurers
entities offering Medicare Advantage (Part C) or Medicare prescription drug plans (Part D), or
Medicaid managed care plans.
The parent organization for a group of subsidiaries that offer health coverage generally would
calculate the net premiums written of all its affected subsidiaries for the purpose of applying the
fee.5
Certain types of health insurers or insurance arrangements are not subject to the fee. These
generally include the following:
• Self-insured plans, in which an employer assumes the financial risk for providing
health benefits to its employees. In 2010, about 60% of enrollees with work-
based coverage were in self-insured plans.6
• Voluntary employees’ beneficiary associations (VEBAs)7 organized by entities
other than employers, such as unions.
• Federal, state, or other governmental entities, including Indian tribal
governments.
• Non-profit entities incorporated under state law that receive more than 80% of
their gross revenues from government programs that target low-income, elderly,
or disabled populations (such as the State Children’s Health Insurance Plan
[CHIP], Medicare, and Medicaid). The nonprofits may not engage in substantial
lobbying, nor engage in political campaign activities.8
• Student health insurance coverage that educational institutions purchase through
a separate, unrelated insurer. The insurer would be the covered entity for the
purpose of applying the fee.
Benefits Covered by the Fee
Health insurance is outlined in the IRS proposed rules as “benefits consisting of medical care
(provided directly through insurance or reimbursement or otherwise) under any hospital or
(...continued)
to pay for services that it provides, rather than using the premiums to pay for services provided by an outside insurer. A
fully insured MEWA will not be subject to the fee even though it receives premiums, if it uses those premiums to pay
an insurance company to provide the coverage being purchased. In that case, the insurance company is the covered
entity because it, not the MEWA, is providing coverage. The regulations cite the example of a MEWA that receives a
$10,000 premium payment from an employer providing medical and separate vision coverage. The MEWA uses $9,000
to pay the premium for coverage under a group policy and $1,000 in direct reimbursements under the vision plan. The
MEWA would be treated as a covered entity only on the $1,000 used to pay for vision coverage.
5 If the controlled group is not an affiliated group that files a consolidated federal income tax return, it may select a
person as the designated entity to report on behalf of the group .
6 Beth Levin Crimmel, “Self-Insured Coverage in Employer-Sponsored Health Insurance for the Private Sector, 2000
and 2010,” Medical Expenditure Panel Survey, Agency for Healthcare Research and Quality, September, 2011,
http://meps.ahrq.gov/mepsweb/data_files/publications/st339/stat339.pdf.
7 A VEBA is a tax-exempt trust fund used to pay insurance benefits, including health insurance, to an association of
members or their dependents.
8 Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57, Federal
Register, p. 14034 -14046, March 4, 2013, https://federalregister.gov/a/2013-04836.
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medical service policy or certificate, hospital or medical service plan contract, or health
maintenance organization contract offered by a health insurance issuer.” Health insurance
includes limited-scope dental and vision benefits and retiree health insurance.9
Certain insurance benefits that are not considered health insurance for purposes of the fee include
accident or disability insurance; liability coverage; workers’ compensation benefits; automobile
medical coverage; credit-only insurance; coverage for certain on-site medical clinics; coverage
for a specific disease or illness; long-term nursing home, home health care, and community-based
care, or any combination thereof; hospital indemnity or other fixed indemnity insurance;10
Medigap11 policies; some types of travel insurance; and some reinsurance.12
Fee Calculation
The ACA fee will be based on net health care premiums written by covered issuers during the
year prior to the year that payment is due. IRS proposed regulations13 define net health care
premiums written as gross premiums from insurance sales (including reinsurance premiums
written), reduced by ACA medical loss ratio rebates14 to enrollees, premiums ceded to reinsurers,
and ceding commissions.15 (Ceded premiums are premiums paid by an insurer to a reinsurance
firm for protection against defined market risks.)
Each year the IRS would apportion the fee among affected insurers based on (1) their net
premiums written in the previous calendar year as a share of total net premiums written by all
covered insurers, and (2) their dollar value of business.16
Covered insurers are not subject to the fee on their first $25 million of net premiums written. The
annual ACA fee would be imposed on 50% of net premiums above $25 million and up to $50
million, and 100% of net premiums in excess of $50 million.
For example, the IRS would not take into account the first $37.5 million of net premiums written
for a covered insurer with total net premiums above $50 million.
9 Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57, Federal
Register, p. 14043, March 4, 2013, https://federalregister.gov/a/2013-04836.
10 Indemnity insurance protects businesses and workers in cases where they are found to be at fault in an accident or
incident. Malpractice insurance is one example of indemnity coverage.
11 CRS Report R42745, Medigap: A Primer, by Carol Rapaport.
12 The IRS definition does not include major medical plans that provide broad coverage to travelers on trips lasting six
months or longer. Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR
Part 57, Federal Register, p. 14044, March 4, 2013, https://federalregister.gov/a/2013-04836.
13 Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57, Federal
Register, p. 14034 -14046, March 4, 2013, https://federalregister.gov/a/2013-04836; and Department of the Treasury,
Internal Revenue Service, “Health Insurance Providers Fee; Correction,” 26 CFR Part 57, Federal Register, p. 17612,
March 22, 2013, http://www.gpo.gov/fdsys/pkg/FR-2013-03-22/pdf/2013-06701.pdf.
14 CRS Report R42735, Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act
(ACA): Issues for Congress, by Suzanne M. Kirchhoff.
15 A ceding commission is a payment to a insurer/reinsurer by an assuming reinsurer providing compensation for
various business expenses.
16Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57, Federal
Register, p. 14039, March 4, 2013, https://federalregister.gov/a/2013-04836.
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Patient Protection and Affordable Care Act: Annual Fee on Health Insurers
• No tax on first $25 million.
• Tax levied on 50% of premiums above $25 million and up to $50 million ($12.5
million).
• Taxable base on first $50 million is $12.5 million ($50 million - $25 million -
$12.5 million).
The proposed rules provide differing treatment for certain tax-exempt insurers such as public
charities, social welfare organizations, high-risk health insurance pools, or consumer-operated-
and-oriented plans (COOP). After applying the fee adjustments (see above) a covered insurer that
is exempt from federal taxes would have the ACA fee applied to only 50% of its net premiums
that are subject to the fee, so long as the premiums are attributable to the insurer’s tax-exempt
activity.
The IRS would calculate each insurer’s actual, annual fee/share of the premium tax based on the
ratio of the insurer’s net premiums written (after adjusting for the above disregards) as a share of
the total net premiums written by all covered entities (after adjustment for the disregards). (See
“Insurer Reporting Requirements.”)
Insurer Reporting Requirements
Insurers will be required to report annual premium data to the IRS by May 1 of the following
year.17 While entities with less than $25 million in net premiums written are not subject to the fee,
they are still required to submit premium information. The IRS will determine the amount of each
firm’s net premiums written based on the annual reports, along with any other source of
information the IRS has available.18
After reviewing the available financial information the IRS would notify each covered insurer or
other entity of its:
1. Preliminary fee allocation.
2. Net premiums written for health insurance, both before and after IRS regulatory
adjustments.
3. Aggregate net premiums written for U.S. health insurance from all covered
entities.
4. Information regarding the process for correcting any errors in the IRS findings.
According to proposed regulations, insurers would have time to review the findings and work
with the IRS to correct any possible errors. The IRS would provide a final determination
regarding any error correction report no later than the point at which the IRS provides the affected
insurer with its final, annual fee calculation.
17 Insurers are to report the information on Form 8963, “Report of Health Insurance Provider Information.”
18 Other sources of information that may be used by the IRS include the Supplemental Health Care Exhibit (SHCE)
required by the ACA, the Medical Loss Ratio annual report form, or similar statements filed with the National
Association of Insurance Commissioners (NAIC), states, or the federal government.
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By August 31 of each fee year the IRS would give each covered entity a final fee determination,
based on the same criteria as the preliminary fee. The final fee may differ from the preliminary
fee, however, based on any error correction, additional information uncovered during the review
process, or a change in the calculation of overall net written premiums for the United States. The
final fee will be due on a date to be set by the Secretary of the Treasury, but no later than
September 30 each year.19
Penalties for Non-compliance
Insurers that fail to file required reports in a timely manner would face a penalty equal to $10,000
and the lesser of (1) an amount equal to $1,000 multiplied by the number of days the firm is out
of compliance, or (2) the amount of the covered entity’s fee for which the report was required.
The penalty will be waived in cases where insurers can demonstrate reasonable cause for not
reporting the information on time.
Insurers would also face penalties for filing inaccurate information that understates net premiums
written. The penalty will be equal to the excess of:
1. The amount of the annual fee the insurer would have paid had the premium data
had been reported accurately, over
2. The amount of the annual fee imposed on the insurer, which was based on faulty
reporting that understated the amount of net premiums written.
Deductibility
Because the ACA premium fee is considered an excise tax by the IRS, the proposed regulations
state that companies cannot deduct the fee from their annual taxes.20
Impact of the Annual Premium Fee
While the federal ACA premium fee is new, states for many years have imposed premium taxes
on insurance products. In 2012, states collected $16.7 billion in premium taxes on a broad range
of insurance (including property and casualty, life, and health products).21 Insurers’ ability to pass
on the new ACA tax, in the form of higher premiums to consumers, will vary based on factors
such as the degree of market competition or a firm’s specific business strategy. Government
programs such as Medicare and Medicaid that contract with private insurers to deliver health
benefits consider an insurer’s tax payments, along with other costs, when setting annual program
reimbursement levels.
19 Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57, Federal
Register, p. 14040, March 4, 2013, https://federalregister.gov/a/2013-04836.
20 Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57, Federal
Register, p. 14040, March 4, 2013, https://federalregister.gov/a/2013-04836.
21 U.S. Census Bureau, 2012 Annual Survey of State Government Tax Collections, Detailed Table, April 11, 2013,
http://www.census.gov/govs/statetax/.
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The Congressional Budget Office (CBO) has estimated that insurers may pass on the ACA insurer
fee to consumers in the form of “slightly” higher premiums for coverage. According to CBO,
prior to the ACA’s passage, because self-insured plans would largely be exempt from the fee, and
because large firms are more likely to self-insure than small firms, the net result would be a
smaller percentage increase in average premiums for large firms than for small firms and for non-
group coverage.22
The Joint Committee on Taxation has estimated that legislation to repeal Section 9010 of the ACA
would result in a 2% to 2.5% reduction in the premium prices of insurance plans offered by the
covered entities.23 The Joint Committee said it expected a very large portion of the fee to be
passed on to purchasers of insurance in the form of higher premiums. The analysis found that
eliminating the fee could reduce annual premiums for a family of four in 2016 by $350-$400.24
Some insurance companies have released estimates regarding the impact of the fee. For example,
Blue Shield of California has forecast the impact of the 2014 insurer fee will equal about 2.3% of
premium.25 Kaiser Permanente has told business clients the insurer fee will amount to roughly
0.65% of premium in 2014.26 Some insurance companies plan to increase premiums or have
asked state regulators to include the impact of ACA costs, including the premium tax, in their
annual rate requests.27 Horizon Blue Cross Blue Shield of New Jersey, for example, estimates that
the tax will increase its costs by $125 million in 2014, spurring an increase in premiums.28 The
company had $9.4 billion in revenues in 2012, with net income of $200 million.
In addition, an April 2013 study by the actuary/consulting firm Milliman estimated that the fee
would result in premium increases of 1.7% to 2.4% in 2014, rising to 2.0% to 2.9% in following
22 Congressional Budget Office, Letter to Senator Evan Bayh, “An Analysis of Health Insurance Premiums Under The
Patient Protection and Affordable Care Act,” November 30, 2009; p. 15; http://www.cbo.gov/sites/default/files/
cbofiles/ftpdocs/107xx/doc10781/11-30-premiums.pdf.
23 Joint Committee on Taxation, Letter to Senator Jon Kyl, June 3, 2011, http://www.ahipcoverage.com/wp-content/
uploads/2011/11/Premium-Tax-JCT-Letter-to-Kyl-060311-2.pdf.
24 Ibid.
25 Blue Shield of California, “Upcoming Affordable Care Act Taxes Effective 2014,” https://www.blueshieldca.com/
bsca/documents/about-blue-shield/health-reform/ACA_Taxes_20Fact_Sheet_final.pdf.
26 Kaiser Permanente, “Affordable Care Act: New Insurer Fees and Their Impact on Your Business.” PDF is available
at Read the Q&A at http://info.kaiserpermanente.org/html/hcr_ca/taxes-fees.html.
27 UnitedHealthGroup, 2012 Annual Report, p. 32, http://www.unitedhealthgroup.com/2012-annual-report/. “This tax
will first be paid and expensed in 2014; however, because our policies are annual, we have included the tax and other
Health Reform Legislation cost factors in our 2013 rate filings relating to 2014 rate periods and any related premium
increases for 2013 policies that have coverage into 2014 will increase the amount of premium recognized in 2013.”
28 Horizon Blue Cross Blue Shield of New Jersey, 2012 Annual Report, p.5; http://www.horizonblue.com/about-us/our-
company/company-reports; and Horizon Blue Cross Blue Shield of New Jersey “Affordable Care Act Imposes Insurer
Fee on Premiums,” http://www.horizonblue.com/sites/default/files/pdf/BB%202013%20Premium%20Tax.pdf. The
firm notes that state minimum loss ratio requirements, which require a certain percentage of premiums to be spent on
enrollee benefits, affect its ability to build in the fee in its individual and small group premiums. In addition, the ACA
imposed a national medical loss ratio requirement. Issuers are allowed to exclude ACA assessments or fees from the
federal MLR calculations for a reporting year only if such assessments or fees were incurred in that reporting year.
Issuers may not exclude ACA assessments or fees they expect to incur in future MLR reporting years. See CMS,
CCIIO Technical Guidance (CCIIO 2013—0003): Question and Answer Regarding the Medical Loss Ratio Reporting
and Rebate Requirements,” July 2, 2013, http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/
Downloads/mlr-guidance-7-02-2013.pdf
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years. The firm said that the fee gives non-profit insurers a competitive advantage, because many
non-profits are exempted or are subject to a lower fee than the for-profit insurers’ fees.29
Breakdown of the Premium Fee
Estimating exactly how the federal premium fee will affect the insurance industry, and existing
government programs such as Medicare and Medicaid, is complicated by a number of factors,
including a lack of detailed data on net premiums.
The National Association of Insurance Commissioners (NAIC) has developed a system for
uniform financial reporting by insurance companies. Currently, the NAIC collects premium data
on direct premiums earned and written, rather than on net premiums written.30 As noted earlier,
the ACA defines net premiums written as gross premiums from insurance sales, minus ACA MLR
rebates, certain commissions, and premiums ceded to reinsurers.
The difference between direct and net premium written is largely reinsurance activity. Any
estimate of the distribution of the ACA fee based on direct premiums earned will most likely
overestimate the size of the market subject to the ACA insurer tax. The NAIC will begin
collecting data on net premiums written via future insurer financial statements. In addition,
companies are to provide information to the IRS as part of their annual reporting requirements
under the ACA.
Existing NAIC data provide some general guidance regarding the possible, proportional
breakdown of the insurance fees. In general, for-profit health insurers in the United States
(excluding California) wrote about $295 billion in direct premiums in 2012.31 Comprehensive
group and health policies accounted for more than half the total, with Medicare (MA and Part D)
accounting for about 24%32 and Medicaid accounting for up to about 19%.33
Medicare and Medicaid
One outstanding question is the potential impact of the premium fee on the Medicare and
Medicaid health care programs. The premium tax does not apply to government programs, so
does not apply to Medicaid and Medicare fee-for-service plans, where the government directly
administers and pays for services. (See “Insurers Subject to the ACA Fee.”)
However, the federal government contracts with commercial insurers to offer Medicare
Advantage and Medicare Part D insurance plans. In addition, a growing share of state-federal
Medicaid insurance plans, mainly managed care plans, are offered by outside issuers, as are some
29 Mathieu Doucet and Julia Yahnke, Milliman, ACA health insurer fee: Estimated impact on the U.S. health insurance
industry, April 2013, http://www.milliman.com/uploadedFiles/insight/healthreform/pdfs/ACA-health-insurer-fee.pdf.
30 The NAIC defines an earned premium as the portion of the total premium amount corresponding to the coverage
provided during a given time period. Direct written premiums are premiums received by an insurance company without
adjustments for ceding of a portion of these premiums to reinsures.
31 Data are from SNL Financial and NAIC.
32 The total does not include Medigap policies, which are not covered by the fee.
33 CRS analysis of 2012 NAIC data using SNL database.
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CHIP plans. For-profit insurers are subject to the ACA premium fee on their Medicare and
Medicaid business.
The share of the Medicare and Medicaid market held for for-profit insurers is significant. For-
profit companies served 71% of Medicare Advantage enrollees in 2011, with not-for-profit
insurers accounting for about 29%.34 About 74% of Medicaid beneficiaries were in some kind of
managed care plan in 2011, according to the Centers for Medicare & Medicaid Services.35
According to the CMS data and a 2010 survey by the Kaiser Commission on Medicaid and the
Uninsured, more than half of Medicaid managed care enrollees are in for-profit plans.36
Because the ACA premium tax will be factored into the rates that states pay insurers to offer
managed care plans, insurance companies and others have warned that it could increase state and
federal costs for the program.37
Government regulations could limit how much of the fee is passed on to Medicare beneficiaries.
For example, Medicare Advantage plans each year are subject to a cap, or maximum
increase, in total beneficiary costs. The premium fee is not a cost factor that will be used to
adjust maximum beneficiary costs, which will effectively limit insurers’ ability to pass on the
fee.
How much of the overall fee will be borne by commercial plans, and how much by the federal
and state governments depends in part on how many states expand their Medicaid programs.
Milliman in its April 2013 study estimated that under current market conditions, commercial
plans would be responsible for about 61% of the fee, with the federal and state governments
shouldering the rest. If all states expanded their Medicaid programs, commercial plans would be
assessed about 49% of the fee, and the state and federal governments would bear the rest.38
Interaction of the ACA Tax and Other Provisions
There are concerns about the potential for the ACA premium tax to increase costs to insurers,
businesses, and consumers. The ACA premium tax is not occurring in isolation, however, but as
34 Gretchen Jacobson, Tricia Neuman, Anthony Damico, and Jennifer Huang, Kaiser Family Foundation, “Medicare
Advantage Plan Star Ratings and Bonus Payments in 2012,” November 2011, p. 6,
http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8257.pdf.
35 Centers for Medicare & Medicaid Services, Medicaid Managed Care Enrollment Report, As of July 11, 2011,
http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Data-and-Systems/Downloads/2011-
Medicaid-MC-Enrollment-Report.pdf. See also: MACPAC, Report to the Congress: The Evolution of Managed Care in
Medicaid, June 2011, p. 2 and 108, https://docs.google.com/viewer?a=v&pid=sites&srcid=
bWFjcGFjLmdvdnxtYWNwYWN8Z3g6NTM4OGNmMTJlNjdkMDZiYw; and Michael McCue and Michael Bailit,
The Commonwealth Fund, “Assessing the Financial Health of Medicaid Managed Care Plans and the Quality of Patient
Care They Provide,” June 2011, p. 3, http://www.commonwealthfund.org/~/media/Files/Publications/Issue%20Brief/
2011/Jun/1511_McCue_assessing_financial_hlt_Medicaid_managed_care_plans_ib_FINAL.pdf.
36 Kaiser Commission on Medicaid and the Uninsured, “Medicaid Managed Care: Key Data, Trends, and Issues,”
February 2012, http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8046-02.pdf.
37 Chris Carlson, Oliver Wyman, Estimated Premium Impacts of Annual Fees Assessed on Health Insurance Plans,
October 31, 2011, http://www.mhpa.org/_upload/OliverWyman-ImpactofPremiumTax.pdf.
38 Mathieu Doucet and Julia Yahnke, Milliman, ACA health insurer fee: Estimated impact on the U.S. health insurance
industry, p. 8, April 2013, http://www.milliman.com/uploadedFiles/insight/healthreform/pdfs/ACA-health-insurer-
fee.pdf.
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part of the ACA’s broad series of taxes and fees, and consumer and business insurance subsidies,
and other health delivery reforms designed to expand the number of Americans with insurance
and slow the rate of government and private market health care spending. The ultimate impact of
the premium fee will depend on how these changes play out.
Federal subsidies will mitigate the impact of higher premiums for some consumers. Under the
ACA health exchanges must be established in every state by January 1, 2014, either by the state
itself or the Secretary of Health and Human Services (Secretary). The exchanges will not be
insurers, but will provide qualified individuals and small businesses with access to health plans
offered by private insurers that meet set, federal standards.39 Individuals and small businesses that
purchase health plans through the exchanges may qualify for federal subsidies and tax credits,
which could reduce their costs and soften some of the impact of the ACA insurer tax.40 The CBO
has estimated that 22 million people will purchase coverage through the exchanges once they are
fully established in 2016, and that roughly 19 million (87%) will receive exchange subsidies.41
In addition, certain small employers are eligible for an ACA tax credit, provided they contribute a
uniform percentage of at least 50% toward their employees’ health insurance. By 2014, for-profit
employers will be eligible for a maximum credit equal to 50% of the employer’s contribution
toward employee premiums, while nonprofit organizations will be eligible for a maximum credit
of up to 35% of employer contributions. The maximum small business tax credit is available for
two consecutive tax years, beginning with the first year the employer offers coverage through an
exchange.42
In addition to premium and small business tax credits, the ACA requires increased regulation and
oversight of insurance costs. The federal government will provide grants to states to review
insurance rates, and will require health insurance companies to provide justifications for any
proposed rate increases that the federal government determines to be unreasonable.43
Issues for Congress
Legislation has been introduced in Congress to repeal the ACA fee on health insurance providers,
and to require fuller consumer reporting regarding the fee. The bills are in addition to other
legislation to repeal the ACA. Among the bills that have been introduced are:
• H.R. 763, To repeal the annual fee on health insurance providers enacted by the
Patient Protection and Affordable Care Act by striking Section 9010.
39 CRS Report R42069, Private Health Insurance Market Reforms in the Patient Protection and Affordable Care Act
(ACA), by Annie L. Mach and Bernadette Fernandez.
40 CRS Report R41137, Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA),
by Bernadette Fernandez and Thomas Gabe.
41 Congressional Budget Office, “CBO’s May 2013 Estimated of the Effects of the Affordable Care Act on Health
Insurance Coverage,” http://www.cbo.gov/sites/default/files/cbofiles/attachments/
44190_EffectsAffordableCareActHealthInsuranceCoverage_2.pdf.
42 CRS Report R41158, Summary of Small Business Health Insurance Tax Credit Under the Patient Protection and
Affordable Care Act (ACA), by Manon Scales and Annie L. Mach.
43 CRS Report R42069, Private Health Insurance Market Reforms in the Patient Protection and Affordable Care Act
(ACA), by Annie L. Mach and Bernadette Fernandez.
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Patient Protection and Affordable Care Act: Annual Fee on Health Insurers
• S. 603, To repeal the annual fee on health insurance providers enacted by the
Patient Protection and Affordable Care Act.
• H.R. 1558, Section 104 of the bill would repeal Section 9010 of the ACA.
• S. 24, Section 104 of the bill would repeal Section 9010 of the ACA.
Related:
• H.R. 1205, To require health plans to disclose in their annual summary of
benefits ACA-imposed taxes and fees.
• S. 764, To require health plans to disclose in their annual summary of benefits
ACA-imposed taxes and fees.
In addition to formal legislation, there has been debate regarding other, possible changes to the
ACA insurer premium fee.
Medicaid
A number of state governors caution that the premium fee will result in higher costs to states that
offer fully capitated Medicaid managed care plans under contract with insurers. Federal
regulations require that premiums paid to Medicaid managed care plans be “actuarially sound.”44
To make that determination, state licensing entities consider insurers’ costs, including health
benefits, marketing and administrative expenses, and taxes.45 Because of cost-sharing limitations
in Medicaid, the fees may not be passed on to enrollees. Instead, if premium rates go up, states
and the federal government, which jointly fund Medicaid, could pay more to operate the program.
The federal government will collect the insurer premium fee, but states will not have new,
offsetting revenues to defray any new costs.
The Republican Governors Association has asked Congress to exempt Medicaid and CHIP
managed care plans from the insurance tax.46 Some analysts say that states will be able to
negotiate with insurers to control premium costs, meaning that the full impact of the fee is
unlikely to be passed along.47
Graduate Medical Education
The Association of American Medical Colleges has proposed using a portion of the premium tax
to help fund U.S. graduate medical education.48 Health policy experts are concerned about the
current size, specialty mix, and geographic distribution of the healthcare workforce. Some experts
44 Balanced Budget Act of 1997 (P.L. 105-33), and 42 CFR 438.6.
45 American Academy of Actuaries, Practice Note, “Actuarial Certification of Rates for Medicaid Managed Care
Programs,” 2005, http://www.actuary.org/pdf/practnotes/health_medicaid_05.pdf.
46 GOP governors Bobby Jindal (LA) and Scott Walker (WI), March 22 letter to Congressional Leaders,
http://www.mhpa.org/_upload/2013-03-22-RGA%20Jindal%20Walker%20tax%20Letter%20to%20Hill.pdf.
47 Paul Van De Water, Center on Budget and Policy Priorities, “Health Reform Tax on Insurers Should Not Be
Repealed: Tax Will Help Pay for Expanding Coverage,” July 25, 2013, http://www.cbpp.org/cms/?fa=view&id=3995.
48 Association of American Medical Colleges, Comment Letter to the Treasury Secretary Jacob Lew, June 3, 2013,
http://www.regulations.gov/#!documentDetail;D=IRS-2013-0011-0068.
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Patient Protection and Affordable Care Act: Annual Fee on Health Insurers
forecast a shortage of physicians, a situation that will be made more acute when millions of
previously uninsured consumers obtain coverage under the ACA.49
Tax Treatment of Recovered Fees
Another outstanding issue involves tax treatment of ACA fees “recovered” by affected
insurers. Some large health care providers have indicated that they plan to recoup the cost of
these excise taxes by levying fees or raising insurance premiums on those enrolled in their plans.
In other words, although the excise tax is levied on health insurance providers, the economic
impact of the excise tax might be borne by consumers. Under current law, increased insurer fees
and premiums that are imposed to compensate, at least in part, for the imposition of the excise tax
will contribute to the health insurers’ calculations of their gross income for tax purposes.
Therefore, these fees will be subject to corporate income tax (just like ordinary revenues earned
through the sales of products and services).
A coalition of insurers has submitted comments to the IRS requesting that extra fees and higher
premium costs be excluded from calculations of gross income. The insurers argue that they are
effectively being “double-taxed”: once through the ACA’s fees/excise taxes, and next based on
income earned from new fees and higher premiums instituted to offset any reduction in profits
due to the tax. In the insurers’ view, the fees should be interpreted by the IRS as a “recovery” for
past excise taxes paid.50 Opponents could argue that such an exclusion would amount to a tax
preference for health insurers, and would also reduce the amount of revenue expected to be raised
through the ACA fee. The IRS in its proposed regulation asked for comments on the issue.51
Author Contact Information
Suzanne M. Kirchhoff
Analyst in Health Care Financing
skirchhoff@crs.loc.gov, 7-0658
49 CRS Report R41278, Public Health, Workforce, Quality, and Related Provisions in ACA: Summary and Timeline,
coordinated by Charles S. Redhead and Elayne J. Heisler.
50 According to formal comments submitted by the Health Working Group, a trade association representing some large
health care insurers, their rationale for this interpretation is based on past legal precedent called the “tax benefit rule.”
For more information on this interpretation, see Healthcare Working Group /Skadden Arps, Comments on Proposed
IRS Rule, http://www.regulations.gov/#!documentDetail;D=IRS-2013-0011-0069.
51 Department of the Treasury, Internal Revenue Service, “Health Insurance Providers Fee,” 26 CFR Part 57, Federal
Register, p. 14034 -14046, March 4, 2013, https://federalregister.gov/a/2013-04836.
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