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Thursday, October 3, 2013

Patient Protection and Affordable Care Act: Annual Fee on Health Insurers

Suzanne M. Kirchhoff
Analyst in Health Care Financing 

The Patient Protection and Affordable Care Act (P.L. 111-148) and the Reconciliation Act of 2010 (P.L. 111-152) impose an annual fee on certain for-profit health insurers, starting in 2014. The aggregate amount of the ACA fee, to be collected across all covered insurers, will be $8.0 billion in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017, and $14.3 billion in 2018. After 2018, the aggregate fee will be indexed to the overall rate of annual premium growth, as calculated by the Internal Revenue Service.

The annual fee will be apportioned among health insurers, based on (1) their market share and (2) their dollar value of business. The fee applies to net health care premiums written, which are defined in regulations as gross premiums from insurance sales minus refunds to enrollees under the medical loss ratio provisions of the ACA, certain commissions, and premiums ceded to reinsurers. Ceded premiums are premiums that an insurer transfers to a reinsurer, as payment for protection against defined market risks.

The ACA fee does not apply to the first $25 million of net premiums written by a covered insurer. The fee will be imposed on 50% of net premiums written above $25 million and up to $50 million, and 100% of net premiums in excess of $50 million. The regulations shield a higher level of net premiums from the fee for insurers that are exempt from federal taxes and are considered to be public charities, social welfare organizations, high-risk health insurance pools, or consumeroperated- and-oriented health plans (COOP).

The ACA fee does not apply to entities that fully self-insure, government-run insurance programs, or non-profit insurers incorporated under state law that receive more than 80% of their gross revenues from government programs that target low-income, elderly, or disabled populations (such as the State Children’s Health Insurance Plan [CHIP], Medicare, and Medicaid).

Some insurance issuers have informed shareholders and state insurance regulators that they intend to pass on the cost of the fee to businesses and enrollees in the form of higher premiums. Private insurers that contract with government organizations to provide Medicare and Medicaid health benefits will be subject to the fee, which could have implications for enrollee premiums and government payments to those plans. It is difficult to estimate the precise impact of the fee on the insurance industry, government programs, and consumers for several reasons, including a lack of public data on net premiums written. In addition, insurers’ ability to pass on the fee will vary depending on competition in local markets, and their individual financial strategies. 

Date of Report: September 13, 2013
Number of Pages: 14
Order Number: R43225
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