Thursday, May 6, 2010

President Obama and Congress have succeeded in a massively disruptive reorganization of health insurance by the federal government. This mission, although most people don’t know it, is about to collide with state budgets, causing much collateral damage nationwide.

Most people remain unaware that health insurance premiums contribute to states’ tax revenues. 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. The looming federal takeover threatens these revenues.

Revenue from premium taxes on health insurance can be a measurable factor in states’ budgets - about $6.5 billion in 2008, generated from just less than 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 the Pacific Research Institute published this month. The study, which I wrote, was necessary because, remarkably enough, the states themselves do not measure the revenues.

Premium taxes generally go into the state’s general fund, but it is conceptually useful to consider them as funding sources for Medicaid and SCHIP (State Children’s Health Insurance Program), health programs for low-income residents that together are the largest item in states’ budgets.

Federal health “reform” will increase Medicaid costs while potentially shrinking premium-tax revenues. My analysis also compares estimated premium-tax revenue from health insurers to state spending on Medicaid and SCHIP.

According to this measurement, Nevada is in the riskiest position of all 50 states. “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 aware of how their revenues could be reduced by what purports to be insurance reform. The federal health insurance takeover threatens states’ abilities to generate this tax revenue in two ways.

First, the takeover would increase the number of people dependent on government programs for their health care. Second, it would drive many businesses and individuals into “exchanges,” which still are poorly defined. Combining these two effects, the Congressional Budget Office estimates that the federal takeover would cause 15 million more people to fall into dependency on Medicaid or SCHIP by 2019 and drive 21 million to 26 million people to buy health insurance through exchanges. While the Senate bill, at least, leaves the initiative to establish exchanges with the states, the federal government can establish one in a state if it is dissatisfied with the state’s efforts or the state declines to launch one.

Many folks who will fall into Medicaid, SCHIP or federally chartered exchanges will no longer have health insurance subject to state premium taxes. Even without “reform,” health insurers’ unpopularity, as well as budget crises, recently have led legislators in Rhode Island, Tennessee and New York to increase their statutory premium-tax rates.

These tax increases are unlikely to raise the revenues their sponsors anticipate. Because premium taxes are passed on to buyers of health insurance, increases in premium taxes can have one or more of three consequences: reduced wages, fewer jobs or more uninsured residents. Economic research suggests that a 1 percent increase in premiums leads to an increase of about 0.5 percent in the number of uninsured. The figure is likely higher for small firms and much lower for larger firms.

States need to report accurately their revenues from premium taxes on health insurers and seek greater clarification about the relationship between states’ powers of taxation and the federal takeover of the regulation of health insurance.

John R. Graham is director of health care studies at the Pacific Research Institute.

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