Why a Health Insurance Provider Tax Is a Bad Idea

November 30, 2010

Facing a massive budget shortfall in the waning days of the 2010 legislative session, Oklahoma lawmakers passed House Bill 2437 to assess a one-percent “fee” on nearly all paid claims by health insurance providers in order to leverage a 3-to-1 federal dollar match for Medicaid.

Oklahoma Insurance Commissioner Kim Holland rightfully challenged the “fee” as an improperly approved tax in violation of the state constitution, which provides that revenue bills may not be passed within five days of legislative adjournment and may only be approved by either a supermajority in the Legislature or by vote of the people.

Though the Oklahoma Supreme Court struck down the law, its ruling is not the end of the insurance provider tax. The court ruled only that the manner in which the tax was passed was a violation of the constitution, not the substance of the tax itself. With another budget shortfall facing legislators in 2011, expect to see the provider tax introduced again.

There are four primary reasons why the provider fee is a bad idea and should be soundly rejected by lawmakers.

First, such an assessment is not a “fee”—it is a direct tax on health insurance providers and an indirect tax on consumers. A fee is a payment for a direct benefit, like paying to use a toll road or paying for a license to hunt. A person pays the fee in return for the benefit. A tax is an assessment paid regardless of whether a direct benefit is received.

While health care providers, Medicaid patients, and hospitals that accept Medicaid patients would benefit directly from such an assessment, none would be responsible for paying the tax. Instead, the tax burden would fall on those insurance providers and self-insured businesses that pay claims to those aforementioned entities benefiting from the increased Medicaid funding.

Second, consumers and employees would bear the secondary burden of this tax, which would undoubtedly be passed on in the form of higher premium costs. Insurers, like any other profit-making entity, are not going to operate at a loss. If an insurer’s or self-insured business’s operating costs increase, it will pass those costs on to consumers and employees.

For a consumer who purchases insurance in the private market, these increased premiums mean his or her wages have less purchasing power. For both an employee whose employer sponsors a health plan and an employee whose employer is self-insured, these increased costs result in lost wages in absolute terms as more of their paycheck is being directed toward insurance premiums.

Third, federal dollars are not “free.” Those dollars are coming out of the paychecks of Oklahoma families. The federal government is currently operating under a $1.5 trillion dollar budget deficit and our national debt recently surpassed $13 trillion for the first time in history. That means every dollar expended by the federal government is deficit spending and must be either borrowed or raised in the form of higher taxes.

If an insurance provider tax is implemented, consumers would be hit up front in the form of higher insurance premiums and hit again with higher income taxes to pay for the federal “matching” funds for Medicaid.

Finally, any policy that seeks to expand Medicaid is per se foolish. Not only does Oklahoma’s Medicaid system consume more than $1 billion in state funds annually, it is highly inefficient and delivers worse health outcomes for its members than those with private insurance, and oftentimes those who have no insurance coverage at all.

Medicaid reimbursement rates to health care providers tend to be much lower than rates under private insurance, leading many physicians to stop treating Medicaid patients altogether.

Because many Medicaid patients are unable to find a primary care physician to treat them, they utilize our state’s emergency rooms more than twice as often as the uninsured. Those that are able to find a primary care physician typically find their health benefits under Medicaid are sparse at best.

The reasons are obvious. There are only three ways for the state to limit spending on Medicaid. It can limit who is eligible to take part in the program, limit benefits for members, or minimize payments to health care providers. All are forms of rationing and all lead to decreased access to care and poor health outcomes for members.

If Oklahoma lawmakers really want to help Medicaid patients, an insurance provider tax is not the answer. Such a tax only burdens consumers, employers, and employees—and merely masks the real problems underlying poor health outcomes for Medicaid patients.

Jason Sutton (J.D., Oklahoma City University) is OCPA’s policy impact director. He formerly served as senior communications officer at the Oklahoma Insurance Department.