August 30, 2013

The Impact of ACA Taxes and Fees

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CHRT Issue Brief August 2013

Under the Affordable Care Act (ACA) 25 million Americans are expected to obtain health care coverage by 2019.1 Many of those who are expected to get coverage under the ACA will either receive subsidies through health insurance exchanges to help make coverage more affordable or will be covered under an expanded Medicaid program. The federal government will fund the premium subsidies along with the majority of the cost of the Medicaid expansion. The Congressional Budget Office estimates that these coverage expansions will require $1.2 trillion in new federal spending over the period 2013–2022.2 The ACA offsets this new spending with reductions in other federal spending and revenues from new taxes and fees. Approximately half of the offset occurs through reductions in spending to providers of care or limitations to tax deductions/credits, with the remainder offset through new taxes and fees.3,4,5

These new taxes and fees vary not only in terms of their purpose, but also in terms of who will be responsible for paying them. Some tax and fee provisions are directed toward individual consumers, but most are directed toward insurers, employers, and certain manufacturers. Even so, many economists believe that the taxes levied on these industries will eventually be passed down to individual consumers, who will then ultimately bear the cost. This brief describes these new taxes and fees and their likely impact on consumers.

1 Congressional Budget Office. May 14, 2013. Effects on Health Insurance and the Federal Budget for the Insurance Coverage Provisions in the Affordable Care Act—May 2013 Baseline. http://www.cbo.gov/sites/ default/files/cbofiles/attachments/44190_EffectsAffordableCareActHealthInsuranceCoverage_2.pdf (accessed 7/25/13).

2 Congressional Budget Office & Joint Committee on Taxation. July 24, 2012. Letter to Speaker John Boehner. Estimates for spending and revenue effects of the Repeal of Obamacare Act H.R. 6079. http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf (accessed 8/1/13).

3 Ibid.

4 Joint Committee on Taxation. June 15, 2012. Estimates for repealing all tax provisions in the Affordable Care Act. http://waysandmeans.house.gov/uploadedfiles/jct_june_2012_partial_re-estimate_of_tax_provisions_in_aca.pdf (accessed 8/1/13).

5 Congressional Budget Office. July 30, 2013. Letter to Representative Paul Ryan. Analysis of the Administration’s Announced Delay of Certain Requirements Under the Affordable Care Act. http://www.cbo.gov/sites/default/files/cbofiles/attachments/44465-ACA.pdf (accessed 8/1/13).

Taxes and Fees Included in the ACA

The ACA includes 13 major new taxes and fees (directed toward individuals, employers, manufacturers, or health insurers) that will offset just over half of ACA financing. Collectively, these taxes and fees are expected to raise approximately $775 billion between 2013 and 2022. Figure 1 Figure 2

Figure 1
Percentage of ACA Financing by Source, 2013–2022

Figure 1

Financing Offset Source Estimated Offset 2013–2022 (in Billions) Percentage of Financing Offset
Reimbursement reductions $627 42.4%
New taxes and fees $775 52.4%
Individual consumer taxes/fees $374 25.3%
Insurer taxes/fees $242 16.4%
Employer taxes/fees $96 6.5%
Manufacturer taxes/fees $63 4.3%
Other revenue provisions $76 5.1%
Total $1,478 100%

Source: Estimates for ACA financing offsets based on CHRT analysis of:
Congressional Budget Office & Joint Committee on Taxation. July 24, 2012.
Joint Committee on Taxation. June 15, 2012.
Congressional Budget Office. July 30, 2013.

Figure 2
Overview of Major Taxes and Fees in the ACA, by Effective Dates

Tax/Fee Provision Effective Dates Remittance responsibility Short Description Fee Calculation Estimated Revenue 2013—2022 (Billions)
Excise Tax on Tanning Services (§ 10907) 2010– Individual Consumers Tax for indoor tanning services, excluding phototherapy delivered by medical professional 10% of the amount paid for tanning services $1.5
Branded Prescription Drug Fee (§ 9008) 2011– Manufacturers Fee to help support the Medicare Supplemental Health Insurance Trust Fund Percentage of applicable sales to government programs $34.2
PCORI Fee (§ 6301) 2013–2019 Insurers and sponsors of self-insured groups Fee to help support the Patient-Centered Outcomes Research Institute
2013:
$1 Per member per year (PMPY)
2014:
$2 PMPY
2015–2019:
Previous year’s PMPY amount adjusted for growth in healthcare spending
$3.8
Additional Hospital Insurance Tax (§ 9015) 2013– Individual Consumers Broadened tax for individuals who earn above $200,000 per year ($250,000 for a married couple) 0.9% tax on employment wages $317.7
Unearned Income Medicare Tax (HCERA § 1402) 2013– Individual Consumers Broadened tax for individuals who earn above $200,000 per year ($250,000 for a married couple) 3.8% tax on unearned investment income
Medical Device Excise Tax (HCERA § 1405) 2013– Manufacturers Tax on sales of specific medical devices, excluding, for example, eyeglasses, contact lenses, hearing aids, over-the-counter devices, and devices qualifying as durable medical equipment under Medicare part B. 2.3% of the sales price for taxable medical devices $29.1
Transitional Reinsurance Program Fee (§ 1341) 2014–2016 Insurers and sponsors of self-insured groups Fee primarily to stabilize premiums in the individual market
2014:
$63 PMPY
2015–2016:
fees will decrease relative to the annual collection amount specified by HHS
$25.0
Health Insurance Provider Tax (§ 9010) 2014– Insurers Industry-wide fee that will offset new spending associated with ACA Percentage of applicable annual net premiums written $101.7
Individual Shared Responsibility Fee (Individual Mandate Fee) (§ 1501(b)) 2014– Individual Consumers Penalty for individuals who do not obtain minimum essential coverage* or do not have an exemption from the requirement
2014:
$95 per adult (up to $285 per family) or 1% of family income, whichever is greater
2015:
$325 per adult (up to $975 per family) or 2% of family income, whichever is greater
2016 and thereafter:
$695 per adult (up to $2,085 per family) or 2.5% of family income, whichever is greater
$55.0
Permanent Risk Adjustment Program Fee (§ 1343) 2014– Insurers Fee to operate the Federal Risk Adjustment Program, which is designed to spread risk across individual and small group insurance providers
2014:
$0.96 PMPY
2015 and thereafter:
fees will be announced in annual notices of benefits and payment parameters
$0.2
Federally-Facilitated Exchange User Fee (§ 1311) 2014– Insurers Fee to support the financial sustainability of Federally Facilitated Exchanges (FFEs)
2014:
Monthly fees of 3.5% of premium revenue for exchange coverage. By rule, estimated impact must be spread across individual and small group market risk pools.
No estimate available
Employer Shared Responsibility Fee (Employer Mandate Fee) (§ 1513) 2015– Employers Penalty for employers that do not provide adequate and affordable health coverage to full-time employees. Employers with fewer than 50 full-time equivalents are exempt from penalties.
2015:
$2,000 per full-time employee per year, beyond the first 30 employees, or $3,000 per full-time employee receiving an exchange subsidy. Penalty amounts will increase thereafter by the rate of premium inflation.
$96.0
Excise Tax on High Cost Health Plans (Cadillac Tax) (§ 9001) 2018– Insurers and sponsors of self-insured groups Tax to incentivize cost reduction and dissuade employers from offering “excessive” health benefits 40% marginal rate on premiums above certain thresholds ($10,200 for single coverage and $27,500 for family coverage in 2018 for most situations—adjusted annually) $111.0
Total         $775.2

* Minimum essential coverage satisfies the requirements of the individual mandate, including employer-sponsored group or retiree coverage, government plans (Medicare, Medicaid, CHIP, and TRICARE), individual market plans, and self-insured group plans. Minimum essential coverage is different from Essential Health Benefits.

Source: Estimates for ACA financing offsets based on CHRT analysis of:
Congressional Budget Office & Joint Committee on Taxation. July 24, 2012.
Joint Committee on Taxation. June 15, 2012.
Congressional Budget Office. July 30, 2013.

Approximately one-fourth of revenue ($374 billion) will come from new taxes and fees remitted by individual consumers, but only for specific groups or circumstances. For example, the Excise Tax on Tanning Services is levied only on those who obtain tanning services at tanning facilities (excluding phototherapy administered by a medical professional) while the Additional Hospital Insurance Tax increase only affects individuals whose annual adjusted gross income exceeds $200,000 ($250,000 for a married couple).

For employers, the most relevant fee under the ACA is generally the Employer Shared Responsibility Payment provision (also known as the Employer Mandate or “Play or Pay” rule), which will penalize certain employers who do not offer adequate and affordable coverage to full-time employees beginning in 2015.6 Previous CHRT reports detail this provision.7,8

Certain manufacturers also face new taxes and fees under the ACA. For example, medical device manufacturers are now levied a flat tax of 2.3 percent on the sales price of taxable medical devices,9 while brand-name drug manufacturers remit a variable annual fee relative to their share of sales to government programs.10

The majority of new tax and fee provisions, however, are directed toward health insurers or plan sponsors for self-funded arrangements.11 In all, there are six major insurer taxes and fees, expected to raise $242 billion from 2013 to 2022—nearly one-third of the new tax revenue under the ACA. The magnitude, applicability and purpose of insurer taxes vary.12 Many will specifically raise revenue to cover the operational costs of programs built into the ACA, such as the Patient-Centered Outcomes Research Institute (PCORI) and the federal permanent Risk Adjustment Program. However, fees for operational costs represent only a small portion of overall revenues from insurer taxes. Indeed, the bulk of revenues from insurers will come from two taxes: the Health Insurance Provider Tax and the Excise Tax on High-Cost Health Plans (also called the “Cadillac Tax”). Combined, these two taxes alone are estimated to raise approximately $213 billion in general revenue from 2013 to 2022 (even though the Cadillac tax does not go into effect until 2018). Revenues from the Health Insurance Provider and Cadillac taxes will financially offset ACA spending, though neither tax directly funds specific ACA provisions. In other words, major coverage expansion provisions will not be affected if the revenue from these taxes falls short of projections.

6 The ACA calls for the employer mandate to take effect in 2014, but guidance issued by the Department of the Treasury on July 2, 2013, stated that the penalties will not be levied on employers until 2015. See Mark Mazur, July 2, 2013, Continuing to Implement the ACA in a Careful, Thoughtful Manner, http://www.treasury.gov/connect/blog/pages/continuing-to-implement-the-aca-in-a-careful-thoughtful-manner-.aspx (accessed 7/25/13).

7 J. Fangmeier and M. Udow-Phillips. 2011. The Affordable Care Act and Its Effects on Midsize and Large Employers (Ann Arbor, MI: CHRT). http://www.chrt.org/assets/policy-briefs/CHRT-Policy-Brief-October-2011.pdf

8 B. Hemmings, R. Waldinger, J. Fangmeier and M. Udow-Phillips. 2013. The Affordable Care Act and Its Effects on Small Employers (Ann Arbor, MI: CHRT). http://www.chrt.org/assets/policy-briefs/CHRT-Issue-Brief-May-2013.pdf

9 Taxable medical devices are defined as devices that are intended for human use specified under Section 201(h) of the Federal Food, Drug and Cosmetic Act.

10 Specific government programs include Medicare Parts B and D, Medicaid, TRICARE and related programs administered by the Departments of Veterans Affairs and Defense.

11 Remittance responsibility may vary for taxes directed toward insurers. Namely, many insurer taxes also place remittance responsibility on sponsors of self-insured group health plans, the majority of which are employers.

12 See Figure A-1 in Appendix for a detailed overview of health insurer taxes.

Potential Impact on Consumers

Taxes and fees directed toward individual consumers will most obviously affect them, but taxes and fees directed toward industry groups will also have an impact on consumers. Even if a tax is nominally levied on health insurers, employers or manufacturers, economists believe that consumers end up paying most of it since these groups pass the cost on to consumers. Economists distinguish between the statutory incidence of a tax, meaning who directly remits the tax, and its economic incidence, meaning who ultimately bears the cost.

The taxes noted in this brief that are directed at health insurers, manufacturers, and employers could all affect consumers. Some of these impacts are intended to alter the behavior of certain groups. For example, the Cadillac tax was included in the ACA to discourage employers from providing health benefits deemed by some to be “excessive.” Other taxes and fees were designed specifically to raise general revenue to offset new federal spending related to the ACA, but there is concern that these taxes will indirectly result in a significant increase in premiums. Some taxes are likely to have eventual impacts on individual consumers, such as the Medical Device Manufacturer Tax, where the economic incidence will first be felt by insurers and employers, then passed down to consumers and employees in the form of higher prices or lower compensation. For other taxes, namely taxes and fees directed toward insurers, the economic incidence will directly impact the cost of coverage. For example, the industry-wide tax on health insurance providers (one of the larger insurer taxes) could potentially increase premium costs by an estimated 2 to 2.5 percent.13

There are other components of the ACA, however, that could mitigate the indirect impact of insurer taxes on premiums paid by consumers. Specifically, there are three premium stabilization provisions built into the ACA: the permanent Risk Adjustment Program; the Transitional Reinsurance Program; and the temporary Risk Corridors Program. These programs are generally intended to protect against the effects of potentially insuring a higher-risk membership and inaccurate rate-setting as more previously uninsured Americans obtain coverage. The risk adjustment program is designed to transfer funds from insurers with lower-than-average risk to insurers with higher-than-average risk and is an ongoing component of the ACA that goes into effect with the coverage expansion in 2014. The transitional reinsurance program will create a pool of funds for health insurers applying for reinsurance payments for high-cost claimants and will be in effect from 2014 to 2016. Similarly, the temporary risk corridors program is designed to make adjustments to the initial rates approved for health plans sold on the insurance exchanges. This is to reduce the volatility in rate-setting in the first years of ACA coverage expansion as more individuals with unknown risk obtain health insurance.

These programs, combined with other market forces such as increased competition among insurers, will have an impact on premiums. The actual premium cost for consumers cannot be projected based on looking at taxes and fees alone. Premiums will be affected by many parts of the ACA—including affordability subsidies, coverage changes, and the individual characteristics of any particular consumer.

13 Joint Committee on Taxation. June 3, 2011. Letter to Senator Jon Kyl. Estimated effects of ACA section 9010 on health insurance premium prices. http://www.ahipcoverage.com/wp-content/uploads/2011/11/Premium-Tax-JCT-Letter-to-Kyl-060311-2.pdf (accessed 7/7/13).

Appendix

Figure A-1
Overview of Health Insurer Taxes and Fees in the ACA by Effective Date

ACA Tax/Fee Effective Dates Short Description Tax Rate/Fee Amount Remittance Responsibility Revenue Estimate 2013–2022 Revenue Linked Directly to Specific ACA Program? Applicable to:
Individual Market Plans Fully Insured Group Plans Self-Insured Plans Medicare Fee-for-service Medicaid Fee-for-service Estimate of Total Members Applicable in Michigan
PCORI Fee (§ 6301) 2013–2019 Fee to help support the Patient-Centered Outcomes Research Institute
2013:
$1 Per member per year (PMPY)
Medicare, insurers, and sponsors of self-insured groups $3.8 billion Yes, for PCORI operations X X X X   8,733,000
Transitional Reinsurance Program Fee (§ 1341) 2014–2016 Fee primarily to stabilize premiums in the individual market. Roughly one fifth of funding raised from 2014-2016 is for general revenues. Small portion will cover administrative cost of running reinsurance program
2014:
$63 PMPY
2015-2016:
fees will decrease relative to the annual collection amount specified by HHS
Insurers and sponsors of self-insured groups $25 billion Yes, $20 billion to fund reinsurance payments and $5 billion for general revenue X X X     7,833,000
Health Insurance Provider Tax (§ 9010) 2014– Industry-wide fee, relative to insurers’ market shares, that will offset new spending associated with ACA Percentage of applicable annual net premiums written Insurers $101.7 billion No X X Stop loss only*     7,833,000
Permanent Risk Adjustment Program Fee (§ 1343) 2014– Fee to operate the Federal Risk Adjustment Program, which is designed to spread risk across individual and small group insurance providers
2014:
$0.96 PMPY
Insurers $20 million (estimate for 2014 only) Yes, for operational costs of the Federal Risk Adjustment Program X X
(small group only)
      977,000
Federally-Facilitated Exchange User Fee (§ 1311) 2014– Fee to support the financial sustainability of Federally Facilitated Exchanges (FFEs)
2014:
Monthly fees of 3.5% of premium revenue for exchange coverage. By rule, estimated impact must be spread across individual and small group market risk pools.
Insurers offering plans on an FFE No estimate available Yes, for operational costs of FFEs X X
(small group only)
      977,000
Excise Tax on High Cost Health Plans (Cadillac Tax) (§ 9001) 2018– Tax to incentivize cost reduction and dissuade employers from offering “excessive” health benefits 40% marginal rate on value of employer-sponsored benefits above certain thresholds ($10,200 for single coverage and $27,500 for family coverage in 2018 for most situations—adjusted annually) Insurers and sponsors of self-insured groups $111 billion No   X X     7,497,000

Estimate of total members applicable in Michigan based on CHRT analysis of 2011 Medical Loss Ratio and American Community Survey data.

* Awaiting further regulatory guidance.

Source: Congressional Budget Office & Joint Committee on Taxation. July 24, 2012.
Joint Committee on Taxation. June 15, 2012.


Suggested Citation: Hemmings, Brandon; Fangmeier, Joshua; Udow-Phillips, Marianne. The Impact of ACA Taxes and Fees. August 2013. Center for Healthcare Research & Transformation. Ann Arbor, MI.

Special thanks to Helen Levy and Jon Linder