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The Premium Tax: What You Need to Know

What is the premium tax and how can this affect you?

You probably hear it all the time: People stating “I’ve heard that health insurance premiums are going to rise? What’s the story?”

Sound familiar? Chances are one reason could be because of the Health Insurance Tax (HIT), otherwise known as the premium tax, a multi-billion dollar tax on most of the nation’s health plans that will begin in 2014 as part of the Affordable Care Act (ACA).

While the premium tax already is spelled out in the ACA legislation, its specifics still are being debated, and how the tax will be calculated and implemented has not yet been determined. Adding to the uncertainty: bipartisan legislation has been introduced to repeal the tax.

Despite the uncertainty, there are several fundamental facts about the tax that are important for you to understand for your business – and so you can answer that inquisitive client.

What’s the tax?

Beginning in 2014, the ACA mandates that most health plans be taxed on their net premiums. This is estimated to collect more than $100 billion over the next 10 years, with the annual amount increasing from $8 billion in 2014 to $14.3 billion in 2018. The total in subsequent years will depend on the rate of premium growth.

The premium tax applies to the fully insured market, while self-insured plans are exempt. Non-profit health plans will receive a 50-percent reduction to their portion of the tax.

Committed to affordability

Unfortunately, the premium tax poses a major challenge to affordability.  All health plans will need to raise premiums on consumers, small businesses and seniors to make up for the additional financial obligation. In addition, state Medicaid budgets will face higher costs as a result of this tax. It is estimated that, nationally, the tax could raise premiums by an average of more than 2 percent in 2014 and more than 3 percent by 2023.

For more information on the Health Insurance Tax and its impact on consumers, watch this short video by America’s Health Insurance Plans (AHIP).

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