With just two weeks to go before the March 31 deadline for applying for health insurance on a government-run exchange, more than 5 million people have signed up for the new plans. When all is said and done, approximately 30 million previously uninsured Americans are expected to have health insurance, either through a government exchange, employer or Medicaid.
So, following that logic, the health insurers behind these plans should be raking in profits from millions of new customers, which, even at reduced rates, should allow them to reap huge rewards.
Not so fast. Along with the influx of new customers, the Affordable Care Act (ACA) is bringing health insurance companies new IRS obligations that could have a major impact on their profitability. While not all of these obligations are outright taxes, the ACA has effectively turned the IRS into a monitoring and enforcement mechanism for many of the health law’s administrative provisions. The cost of meeting these requirements will act as a tax of sorts.
Insurance Industry Excise Tax
Chief among these is an $8 billion fee, which, effective this past January, is levied on all health insurers based on their total market share of net premiums written for different health risk pools. As the recent Thomson Reuters Thomson Reuters Checkpoint special report Tax Changes in Health Care Reform Legislation explains, this fee will be allocated based on the risk pools each insurer covers. Those who take on more customers with higher levels of health risk will pay less, while those who take on primarily low-risk new customers will pay more.
This fee is essentially structured as an excise tax on insurance companies. The flat fee for the industry starts at $8 billion this year and will increase to $14.3 billion by 2018. To put that in perspective, the widely derided medical device tax, which imposes a 2.3% excise tax on several medical technologies, is only expected to generate about $2.9 billion in tax revenue per year.
This is a big number that will have a material impact on insurance company cash flows starting this year. In fact, the Congressional Budget Office has said that it expects the tax to result in an overall increase in premiums as the insurance companies pass along the increased costs to their members. Consultancy Oliver Wyman has taken the estimate one step further, suggesting that the tax will result in an increase in insurance premiums of $500 per covered worker by 2020.
New Forms: 1095-B Compliance
Another significant tax hurdle for insurance companies isn’t really a tax at all, but rather a new tax form called the 1095-B, which is required for all covered lives, starting in tax year 2015. Essentially, because the Affordable Care Act requires all U.S. citizens to have some form of insurance, the burden of proof of coverage now falls on the insurance providers who must file this new form with the IRS each year to document that each of their members has insurance.
That sounds reasonable enough, until you factor the herculean challenge of having to mail a copy of the IRS tax forms to policyholders, totaling 317 million Americans. As of December 2013, the two largest health insurers in the U.S., United Healthcare and WellPoint WellPoint, had a combined 106 million members.
Ignore for a moment the filing requirements and organizational challenges of sending a new form with accurate identification information to every customer – and just focus on the postage. At 49 cents per stamp, it will cost approximately $52 million for United Healthcare and WellPoint just to mail the forms to their customers. Even if some consolidation of household forms is allowed, and bulk postage rates are applied, the administrative cost to insurers is still significant.
Now, factor in the implications of getting insurance company data systems ready to comply with IRS requirements that are based on Social Security numbers. In many cases, insurance companies have built their customer data infrastructure around account numbers, which may or may not be linked to underlying Social Security numbers. If that link isn’t already built into the system, this could trigger the need for major programming infrastructure changes across the industry.
Many insurers will outsource the 1095 function, ultimately creating a new layer of business opportunity in the service sector. However, when factoring the ultimate impact to health insurers, 1095 compliance will become a real cost that was nonexistent a year ago.
History is littered with examples of industries overcoming challenging tax environments and still succeeding, but one has to wonder if the design of the Affordable Care Act will ultimately help or hinder its intended goal. What we do know is that there will be an increased cost to businesses to comply with the law. In the case of the health insurance industry, it has been made clear by the industry itself that these costs will ultimately trickle down to consumers in the form of higher premiums. We also know from speaking with our customers that there is an increased push for operational readiness to comply with the various reporting requirements that come along with the Affordable Care Act. These things come at a cost – one that will likely trickle down to the policy holder, unfortunately making affordable care even less affordable.