Health Insurer Tax Gives Nonprofits Advantage, Holtz-Eakin Says

Fees that health insurers will be required to pay the U.S. government starting in 2014 will give nonprofits such as Kaiser Permanente a market advantage over corporate competitors, said economist Douglas Holtz-Eakin.

The fees -- starting at $8 billion and escalating each year based on the industry’s premium revenue -- aren’t tax deductible. While nonprofits don’t have an income tax, companies such as UnitedHealth Group Inc. (UNH) would effectively be paying taxes on the fees they’re handing over to the government, said Holtz-Eakin, chief economist of the White House Council of Economic Advisers during the Republican Bush administration from 2001 to 2003.

The fees were set in 2010 by congressional Democrats to help pay for the $1.1 trillion U.S. health care law. The Supreme Court may rule the law unconstitutional in a decision slated for this month. The tax would cause insurers to raise premiums, with nonprofits having a cost advantage to lure customers, Holtz- Eakin said in a telephone interview.

“Customers are going to notice this,” said Holtz-Eakin, who ran the nonpartisan Congressional Budget Office after leaving the Bush administration and is now president of the Washington-based American Action Forum. “Certainly the cheaper firm is going to advertise this.”

The American Action Forum, a group that supports smaller government and includes former Republican lawmakers on its board, is publishing a study on the fees today.

Customer Makeup

A Kaiser Permanente spokesman said the tax is unfair to the Oakland, Calif. company because so-called self-insured employer plans administered by for-profit insurers would be exempt from it.

“Most of the for-profits have about half of their business in the self-insured market,” said John Nelson, a spokesman for Oakland, California-based Kaiser Permanente, by phone. “So about half of their business is not subject to the tax at all.”

“Close to the entirety” of Kaiser’s 9 million customers are in plans that are subject to the tax, he said.

The 2010 health law will expand insurance coverage to an estimated 32 million people who lack it by 2016, according to the Congressional Budget Office. Private insurers stand to pick up at least half those new customers.

“Even though this tax, if you were to take it in isolation, would tend to increase the price of insurance, the other elements of the Affordable Care Act would tend to work in the opposite direction and offset it,” said Paul Van de Water, a former CBO analyst who is now a health economist at the nonprofit Center for Budget and Policy Priorities in Washington, which supports the law.

Fee Inequity

Insurers that pay income tax would have to raise premiums $1.54 to make up for every $1 they pay in excise tax, Holtz- Eakin calculated. Insurers exempt from income tax will have to raise premiums $1 to offset the same amount.

“It’s a big inequity, because we’ll be competing with those plans,” said Alissa Fox, who directs lobbying for the Blue Cross Blue Shield Association, a Washington-based federation of insurers that pay corporate income taxes.

The industry must pay $8 billion in 2014, with the fees rising to $14.3 billion in 2018. Collections will grow at the pace of medical inflation thereafter. The law requires that each insurer’s share of the tax be proportional to its share of U.S. health premiums.

The Joint Committee on Taxation of the U.S. Congress said in May 2011 that the tax would increase insurance premiums by as much as $400 for family coverage in 2016.

To contact the reporter on this story: Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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