Repeal of three ACA taxes reduces uncertainty in health care
In late December of 2019 Congress passed legislation that repealed three health care and life science taxes: the medical device tax, the excise tax on high cost employer-sponsored health coverage (the so-called 'Cadillac tax'), both effective Jan. 1, 2020 and the health insurance tax, effective Jan. 1, 2021. These taxes were passed with the Affordable Care Act (ACA) and their repeals were included in so-called ‘minibus’ appropriations bill. While the immediate dollar impact of these repeals varies throughout the economy, the repeals bring welcome certainty to two sectors that experienced plenty of legislative and regulatory uncertainty in 2019.
These taxes were all enacted as a means to financially support the ACA. While about 50% of all adults have favorable views of the ACA1, the three recently-repealed taxes were politically unpopular. Congress had successfully delayed and unsuccessfully tried to repeal each tax several times over the past few years.
Medical Device Tax
The medical device tax was a 2.3% excise tax on most medical equipment intended for human use. Key exemptions included hearing aids, eye glasses, contacts and other medical device goods purchased at retail for individual use.
The ad valorem nature of this tax made it difficult to determine the ‘price’ that should be taxed, particularly for vertically-integrated manufacturers and distributors of the devices. The IRS provided some guidance on the broad retail exemption, however the exemption still contributed to further confusion about what should be taxed at which steps in the supply chain.
This tax was in effect from 2013 through 2015, after which it was suspended and delayed several times until its eventual repeal.
Health Insurance Tax
The annual fee on health insurance providers, also referred to as HIT, was essentially a sales tax on most health insurance plans in the United States. Notable exceptions include self-insured employers, governmental entities, certain nonprofit corporations, and non-employer established section 501(c)(9) entities.
The tax was calculated at an aggregate industry level and then allocated to each underwriter based on that company’s proportion of total non-exempt premiums underwritten during that year. The tax was also regressive; a company would not pay tax on the first $25 million of net premiums written and would only get allocated half the tax on the next $25 million of net premiums written.
The tax was active in 2014, 2015, 2016 and 2018. The tax was suspended in 2017 and 2019 in an effort to reduce premium cost. In 2014 the total allocable fee was $8 billion. This fee rose to $14.3 billion in 2018. The tax was estimated to be $15.5 billion in 2020.
Excise Tax on High Cost Employer Sponsored Health Coverage, a.k.a. the Cadillac Tax
The Cadillac tax was set to impose a 40% excise tax on generous employer-sponsored health plans. While initially set to take effect in 2018, it was delayed twice before it was ultimately repealed before any taxes were collected.
The excise tax would have affected employer-sponsored plans with individual or group plans that conferred value in excess of $11,200 or $30,150, respectively, in most cases. Certain groups, such as those over 55 or in high-risk occupations could receive higher benefits before triggering the excise tax.
The tax would have been paid by the insurance companies. Some analysts suggest the cost would have been pushed to employees in the form of lower wages. Removing the excise tax may reduce the uncertainty around benefit plan design for some employers.
Total tax cuts in the spending bill are estimated at $426.3 billion according to the bipartisan group Joint Committee on Taxation. Many hope these tax cuts get passed to patients or fuel additional investment in the healthcare system. Time will tell, but in the meantime the industry won’t experience the annual uncertainty of whether or not one of these taxes will or will not be in effect.
Other sources:
- https://healthpayerintelligence.com/news/health-insurance-tax-may-rise-1.2-billion-due-to-new-cms-payment-rule
- https://docs.house.gov/billsthisweek/20191216/BILLS-116HR1158SA-RCP116-43.PDF
- https://appropriations.house.gov/news/press-releases/house-to-consider-domestic-priorities-and-international-assistance
- https://center-forward.org/basics/health-insurance-tax/
- https://www.irs.gov/irb/2013-51_IRB#TD-9643
- https://www.irs.gov/businesses/corporations/health-insurance-provider-fee-2017-moratorium-2019-suspension-and-repeal-after-the-2020-fee-year-questions-and-answers
- https://www.irs.gov/pub/irs-drop/N-14-47.pdf
- https://www.ahip.org/with-permanent-repeal-of-the-health-insurance-tax-and-40-excise-tax-consumers-will-pay-less-for-coverage/
- https://www.taxpolicycenter.org/briefing-book/what-cadillac-tax
