When the new insurance tax hits Medicaid managed care plans this year, it will basically leave the government taxing itself and perhaps spur more states to start contracting with not-for-profits.
The Affordable Care Act's annual fee on health insurance is set at $8 billion in 2014, to be divided among most commercial, Medicare and Medicaid health plans based on market share, then growing to $14.3 billion in 2018 and indexed to the rate of premium growth thereafter.
In the 37 states with Medicaid managed care, the tax will have the unique effect of "the federal government taxing states and itself," as a Milliman report commissioned by Medicaid Health Plans of America put it.
Assuming a moderate pace of states accepting federal Medicaid expansion, the Medicaid managed care portion of the tax will cost the Medicaid program about $37 billion through 2024, with states paying about $13 billion, the Milliman report found.
While the idea might leave some ACA proponents puzzled, most states are likely to end up compensating Medicaid managed care plans for the fees in some way, either blended into rates or in end-of-year payments, thanks to provisions in the 1997 Balanced Budget Act requiring Medicaid managed care rates to be "actuarially sound" in covering administrative costs, taxes and fees.
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," as Milliman actuaries John Meerschaert and Mathieu Doucet wrote.
Those federal rules have left executives at publicly-traded insurers like Centene and UnitedHealth Group reassuring investors that they'll be reimbursed. UnitedHealth CEO Stephen Hemsley said in January that about about half of the states the company has Medicaid contracts with officially confirmed that the fee would be reimbursed, while the others have committed verbally.
There's another scenario, though: states could opt to contract with non-profit Medicaid managed care organizations that are exempt from the ACA tax.
The ACA specifically exempts from the fee non-profit health plans with more than 80 percent of premium revenue from Medicare, Medicaid, CHIP and dual eligible plans, and non-profit insurers are of course exempt from corporate income taxes.
"Even though both non-profit and for-profit plans offer exceptional services to the poorest patients in a state," that exemption "results in the tax not being uniformly applied, affecting Medicaid beneficiaries and the states in an uneven fashion," Meerschaert and Doucet wrote.
"The treatment of non-profit Medicaid MCOs in the health insurer fee calculation may distort the competitive balance between for-profit and non-profit MCOs, creating a situation where state governments will incur the additional cost of funding increased Medicaid managed care payments if they contract with for-profit MCOs," Meerschaert and Doucet wrote.
Just over 40 percent of Medicaid managed care premiums were paid to non-profit MCOs in 2011, according to the Milliman report -- and two of the largest states have mostly non-profit plans.
In California, Colorado, Minnesota and New York, more than 75 percent of Medicaid managed care premiums in 2011 went to non-profits, according to Milliman's analysis; in Massachusetts, New Jersey, Ohio, Oregon and Virginia, non-profit MCOs collected at least half of all premiums that year.
Meanwhile, 18 states, including Florida and Michigan, saw less than 25 percent of all Medicaid managed care payments going to non-profit MCOs in 2011.
To cover the ACA insurance fee, most of those 18 states are expected to have to raise payments over the next decade, by as much as 2.25 percent, while states like California and New York with more non-profits might expect to have increases of just under 1 percent, according to the report.
Whether or not more states start favoring non-profits in Medicaid bidding, the ACA fee is going to have a sizable impact. On average nationwide, Meerschaert and Doucet expect the fee to lead to a 1.2 percent increase in Medicaid managed care payments this year and to increases of perhaps 1.6 percent thereafter.