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J. Brent Moore, Esq.
Montgomery & Andrews, P.A.
(505) 986-2648

REPEAL OF THE FEDERAL AMOUNT FEE ON HEALTH INSURANCE PROVIDERS AND THE CREATION OF NEW MEXICO'S NEW HEALTH CARE AFFORDABILITY FUND

During the 2021 legislative session of the New Mexico Legislature, the State of New Mexico enacted legislation that created a new “Health Care Affordability Fund” (the “Fund”).[1] This article will examine the origin and establishment of the Fund, its funding source, and its proposed attempt to provide increased health insurance coverage beginning January 1, 2022.[2] 

I. Federal Health Insurance Tax

The creation of New Mexico’s new Fund, and the associated increase in the existing health insurance premium surtax, is connected to the federal health insurance tax in the Patient Protection and Affordable Care Act and is a direct result of the repeal of that federal health insurance tax. This federal tax was first enacted as part of the Patient Protection and Affordable Care Act (“PPACA”) and was called an annual fee on health insurance providers (Section 9010).[3] It was also referred to as the health insurance tax (“HIT”). While the tax was enacted as an annual fee on health insurance providers, the annual fee essentially functioned as a sales tax on most health insurance plans in the United States. The tax was enacted as a means to financially support the coverage expansion under the PPACA. 

Concerns about the financial impact of the tax on health insurance consumers emerged even before the passage of the tax.[4] The Congressional Research Service estimated that the total allocable fee would $8 billion in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017, and $14.3 billion in 2018.[5] Concerns related to the impact of the tax lead to a reluctance to let the tax remain in effect. The tax was active in 2014, 2015, 2016, and 2018, but it was suspended in 2017 and 2019 in an effort to reduce premium costs. Then in December of 2019, actuaries at the Office of the Actuary within the Centers for Medicare & Medicaid Services issued an analysis identifying the HIT as a major driver of health care cost growth in 2018.[6] This analysis confirmed that the burden of the annual fee on health insurance providers would be borne by health insurance consumers.

Recognizing the financial burden posed by the imposition of the HIT on health insurance consumers, Congress repealed the federal tax. In late December of 2019, Congress passed legislation on a bipartisan basis that repealed three health care and life science taxes: (1) annual fee on insurance providers effective January 1, 2021; (2) the medical device tax; and (3) the excise tax on high cost employer-sponsored health coverage (the so-called “Cadillac tax”), both effective January 1, 2020.[7] As a result of the repeal of the HIT, 2020 was the last fee year.[8]

II. State Replacement of the Repealed Federal Tax

After the repeal of the HIT, several states saw an opportunity to fill the void and enact state taxes to replace the repealed federal tax. In addition to New Mexico, new state health insurance taxes have been adopted in Colorado, Delaware, Maryland, and New Jersey. The new taxes have been enacted to increase the affordability for some, but not all purchasers, of health insurance. The following is brief description of each state’s approach to the new state taxes and the use of the revenue generated.

A. Colorado

In 2020, Colorado enacted a new law that imposes an assessment of one and fifteen-hundredths of a percent (1.15%) of premiums collected by nonprofit carriers and imposes an assessment of two and one-tenth percent (2.1%) of premiums collected by for-profit carriers.[9] The primary uses of the funds generated by the assessment are to provide: (1) funding for Colorado’s reinsurance program; (2) payments to carriers to increase the affordability of health insurance on the individual market for consumers who receive the premium tax credit; (3) subsidies for state-subsidized individual health coverage plans purchased by qualified individuals; (4) funding for actual administrative costs of the enterprise for implementing and administering health insurance affordability enterprise; and (5) funding for costs for consumer enrollment, outreach, and education activities regarding health care coverage, including increasing grants to the Colorado’s state based exchange’s certified assistance network, marketing for the exchange, grants to community-based organizations that are able to assist with outreach and enrollment, particularly in communities that face the greatest barriers to enrolling in health care coverage, and improving the connection between unemployment services and enrollment in health care coverage.[10]

B. Delaware

In Delaware, a new law enacted in 2019 imposed an assessment of two and seventy-five hundredths percent (2.75%) on carriers for all amounts used to calculate the entity's premium tax liability or the amount of the entity's premium tax exemption value for the previous calendar year.[11] “Carrier” is defined as any entity that provides health insurance in Delaware and includes an insurance company, health service corporation, health maintenance organization, managed care organization, and any other entity providing a plan of health insurance or health benefits subject to state insurance regulation.[12] The assessment is not imposed on Medicare, Medicaid, stand-alone dental insurance, stand-alone vision insurance, long-term care insurance, disability income insurance and all accident-only insurance.[13] The purpose of the assessment is to fund the Delaware Health Insurance Individual Market Stabilization and Reinsurance Program (“Program”).[14] The Program is projected to lower premium rates in the individual health insurance market by approximately twenty percent (20%) and improve the morbidity of the individual single risk pool by as much as six-tenths of a percent (0.6%).[15] 

C. Maryland

In 2019, the State of Maryland imposed an assessment of two and seventy-five hundredths percent (2.75%) on all amounts used to calculate an entity’s premium tax liability or the amount of the entity’s premium tax exemption value for the calendar year 2018.[16] The assessment applies to an insurer, a nonprofit health service plan, a health maintenance organization, a dental plan organization, a fraternal benefit organization, and any other person subject to regulation by the state that provides a product that was subject to Section 9010 of the Affordable Care Act.[17] For calendar years 2020 through 2023, in addition to the amounts otherwise due, those same entities are subject to an assessment of one percent (1%) on all amounts used to calculate the entity’s premium tax liability or the amount of the entity’s premium tax exemption value for the immediately preceding calendar year.[18] The assessment is also imposed on managed care organizations for the Medicaid program.[19] The purpose of the assessment is to assist in the stabilization of the individual health insurance market by assessing a health insurance provider fee that is attributable to state health risk for calendar years 2019 through 2023.[20]

D. New Jersey

In 2020, the State of New Jersey enacted an assessment of two and five-tenths percent (2.5%) of a health benefits plan’s net written premiums that must be annually filed by April 1 and paid by May 1.[21] The assessment is imposed on insurance companies, health service corporations, hospital service corporations, medical service corporations, health maintenance organizations, or dental plan organizations authorized to issue health benefits or dental benefits plans in New Jersey, and registered multiple employer welfare arrangements.[22] The assessment is not imposed on Medicaid, Medicare, Medicare Advantage, Medicare supplement, accident-only, credit, disability, long-term care, TRICARE supplement coverage, coverage arising out of a workers' compensation or similar law, automobile medical payment insurance, personal injury protection insurance, small employer health benefits plans, and hospital confinement indemnity coverage.[23] The revenue generated by the assessment will be deposited into the Health Insurance Affordability Fund for the purposes of increasing affordability in the individual market and providing greater access to health insurance to the uninsured, including minors, with a primary focus on households with an income below four hundred percent (400%) of the federal poverty level.[24] The revenue will also be used for the purpose of expanding eligibility, or modifying the definition of affordability in the individual market, through subsidies, reinsurance, tax policies, outreach and enrollment efforts, buy-in programs, such as the NJ FamilyCare Advantage Program, or any other efforts that can increase affordability for individual policyholders or that can reduce racial disparities in coverage for the uninsured.[25] The assessment went into effect in 2021.[26]

III. New Mexico’s Health Coverage Landscape

In New Mexico, government programs are the dominant forms of health coverage. Medicaid coverage is by far the leader with more than forty percent (40%) of New Mexicans covered by Medicaid.[27] In June 2020, 869,000 thousand total beneficiaries were in the program with forty-three (43%) of beneficiaries being children.[28] The majority of children in the state, fifty-six percent (56%), are enrolled in Medicaid.[29] Another seventy-two percent (72%) of all births in New Mexico are covered by Medicaid.[30] In addition, fifteen percent (15%) of New Mexico’s population is covered by Medicare.[31] These large enrollment numbers in government health coverage programs lead some to believe that additional government involvement might be a solution to providing health coverage to the uninsured population in New Mexico.

As of 2019, the uninsured population in New Mexico was approximately ten percent (10%) of the population.[32] Providing coverage for this uninsured population, and well as reducing health care premiums and cost sharing for those who purchase health care coverage on the New Mexico health insurance exchange, was a primary motivation for the sponsors of the New Mexico legislation. While there was no debate regarding the goal of the coverage proposal, there was strong debate over how to pay for it and who should pay for it.

In contrast, according to the New Mexico Superintendent of Insurance, those purchasing health insurance (fully-insured private major medical coverage) comprised less than 169,000 or less than twelve percent (12%) of the total population of New Mexico in July 2020.[33] This small population will bear the burden of the surtax increase in order to provide coverage to the target populations.

IV. Taxation of Health Insurance in New Mexico

Prior to the enactment of the new Fund, health insurance in New Mexico was subject to both a general premium tax of three and three-thousandths percent (3.003%) and an additional surtax of one percent (1.0%).[34] The premium tax and the surtax were collected by health insurance companies from purchasers of health insurance and then remitted to the State of New Mexico. Under the new law, the health insurance premium surtax will be increased to a rate of three and seventy-five hundredths percent (3.75%) of the gross health insurance premiums and membership and policy fees received by the taxpayer on hospital and medical expense incurred insurance or contracts; nonprofit health care plan contracts, excluding dental or vision only contracts; and health maintenance organization subscriber contracts covering health risks within New Mexico during the preceding calendar year.[35] This amount is in addition to the general premium tax (3.003%) and will result in a total premium tax of six and seven hundred fifty-three thousandths percent (6.753%) on health insurance products purchased in New Mexico. This combined rate will make New Mexico’s premium tax rate the highest in the United States.[36]

V. State Receipt of Health Care-Related Taxes from the Federal Government

A key consideration for the new Fund is the application of the surtax to the Medicaid program in New Mexico. According to the Office of Superintendent of Insurance’s estimates, approximately seventy-five percent (75%) of the revenue generated by the new law will come from Medicaid managed care organizations (“MCOs”).[37] This revenue paid to the state by the MCOs will be remitted from funds that were paid to the MCOs by the New Mexico Human Services Department (“HSD”). In turn, HSD will receive additional funds from the federal government as a part of its draw down of the federal financial participation for the Medicaid program in New Mexico. The application of the state surtax to the Medicaid program is possible under the federal Medicaid rules, which provide that a state may receive health care-related taxes from the federal government, without a reduction in the federal financial participation, if certain conditions are met.[38] 

The required conditions for a state to receive health care-related taxes from the federal government are the following: (1) the taxes are broad based; (2) the taxes are uniformly imposed throughout a jurisdiction; and (3) the tax program does not violate hold harmless provisions.[39] A health care-related tax is a licensing fee, assessment, or other mandatory payment that is related to health care items or services, the provision of, or the authority to provide, the health care items or services, or the payment for the health care items or services.[40] A health care-related tax is considered broad based if the tax is imposed on at least all health care items or services in the class or providers of such items or services furnished by all non-federal, non-public providers in the state, and is imposed uniformly.[41]

Under the New Mexico approach, the Medicaid program will pay the surtax to the MCOs that implement the program, and then HSD will draw down those amounts from the federal government as part of the federal matching portion associated with the surtax increase. While the proposal was being considered by the New Mexico Legislature, HSD stated that the Medicaid program would increase the per-member per-month capitation rates that it pays to the Medicaid managed care organizations.[42] For the 2nd half of FY22, this would result in an estimated total cost of approximately $75 million, with a general fund estimated impact of $15.1 million, which would draw down approximately $59.9 million in federal funds. In FY23, the total cost is estimated at $150.1 million, with an estimated general fund impact of approximately $30.2 million, which would draw down approximately $119.9 million in federal funds.[43]

VI. New Mexico Health Care Affordability Fund

The Fund has very broad, general uses identified for the revenue generated by the surtax increases. The expressed purposes of the new Fund are to: (1) reduce health care premiums and cost sharing for New Mexico residents who purchase health care coverage on the New Mexico health insurance exchange; (2) reduce premiums for small businesses and their employees purchasing health care coverage in the fully insured small group market; (3) provide resources for planning, design and implementation of health care coverage initiatives for uninsured New Mexico residents; and (4) provide resources for the administration of state health care coverage initiatives for uninsured New Mexico residents.[44] The Superintendent of Insurance is charged with the administration of the Fund.[45] 

The Superintendent of Insurance, in consultation with other relevant state agencies, is required to promulgate rules to implement the new law. The rules must: (1) provide enhanced premium and cost-sharing assistance to individuals and families for the purchase of qualified health plans on the New Mexico health insurance exchange; and (2) establish income eligibility parameters for the health care affordability criteria for plan year 2023 and each subsequent calendar year based on available funds.[46] In providing assistance, the Superintendent of Insurance is required to develop health care affordability criteria designed to reduce the amount that individuals pay in premiums and out-of-pocket medical expenses for qualified health plans offered on the New Mexico health insurance exchange.[47] Under the new law, New Mexico residents who qualify shall have an income that is eligible for advanced premium tax credits under the Patient Protection and Affordable Care Act.[48]

Finally, the Superintendent of Insurance, in consultation with other relevant state agencies and consumer groups, is required to develop a plan for extending health care coverage access to uninsured New Mexico residents who do not qualify for federal premium assistance or, except by reason of incarceration, qualified health plans, through the New Mexico health insurance exchange.[49] The Superintendent of Insurance must submit a plan to the Legislature no later than June 30, 2022, that can offer health care coverage to eligible New Mexico residents beginning July 1, 2023.[50] The plan must include: (1) details about health care benefits; (2) health care affordability criteria designed to reduce the amount that individuals pay in premiums and out-of-pocket medical expenses under the plan and that result in, to the greatest extent possible, health care costs comparable to costs for New Mexico residents; and (3) income eligibility parameters that prioritize eligibility for New Mexico residents with incomes under two hundred percent (200%) of the federal poverty level.[51]

VII. Contingency Provisions

While the proposed legislation was under consideration, concerns were raised regarding potential future changes in federal law, including the complete repeal of the PPACA and the potential reinstatement of the HIT. In response to these concerns, the new law provides that if the PPACA is repealed in full or in part by an act of Congress or invalidated by the United States Supreme Court and eliminates or reduces comprehensive health care coverage for New Mexico residents through Medicaid or the New Mexico health insurance exchange, the Fund may be used to maintain coverage through the New Mexico health insurance exchange or through medical assistance programs administered by HSD, provided that coverage is prioritized for New Mexico residents with incomes below two hundred percent (200%) of the federal poverty level.[52] In addition, while the possibility of reinstatement of the HIT is subject to debate, the new law addressed this potential reinstatement. The new law provides that if an Act of the United States Congress is signed into law that imposes the annual fee on health insurance providers pursuant to Section 9010 of the PPACA, or that imposes a substantially similar fee on the same class of taxpayers, the rate of the health insurance premium surtax shall be decreased at a rate equal to the rate of the annual fee imposed.[53] A reduction in the health insurance premium surtax shall go into effect on the later of the effective date of the imposition of the federal annual fee or ninety days after the congressional Act imposing the federal annual fee is signed into law.[54]

VIII. Conclusion

While the goal of increasing health insurance coverage is an admirable and worthy pursuit, it remains to be seen whether the imposition of the highest premium tax in the United States on less than twelve percent (12%) of New Mexicans is the correct approach to accomplishing this goal. There were sound reasons for the repeal of the HIT at the federal level, and the conversion of the federal tax to a state tax does not relieve the concerns that prompted the federal repeal. The new law requires the Superintendent of Insurance to develop and report on performance measures relating to the Fund and provide actuarial data from the Fund to the Legislature. Time, and the New Mexico Legislature, will tell whether New Mexico is on the right path to increasing health insurance coverage.

References

[1] S.B. 317, 55th Leg., 1st Sess., Chap. 136 (N.M. 2021). While the original proposal in SB317 was to remove all cost sharing for behavioral health services, the new health care affordability fund (introduced as HB122) was amended into SB317 on the House floor near the end of the legislative session. While the new health care affordability fund proposal was approved by the full Senate on a concurrence vote, the proposed new fund was never heard in a Senate committee.

[2]Id. § 11.

[3] Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 9010, 124 Stat. 119 (2010); Health Care and Education Reconciliation Act, Pub. L. 111-152, 124 Stat. 1029 (2010).

[4] Cong. Budget Off., An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act., at 15-16 (2009).

[5] SUZANNE M. KIRCHHOFF, CONG. RSCH. SERV., PATIENT PROTECTION AND AFFORDABLE CARE ACT: ANNUAL FEE ON HEALTH INSURERS, (Dec. 12, 2013).

[6] Micah Hartman et al., National Health Care Spending In 2018: Growth Driven By Accelerations In Medicare And Private Insurance Spending, Costs & Spending, CMS Off. of the Actuary, Dec. 5, 2019, at 8.

[7] Further Consolidated Appropriations Act of 2020, H.R. 1865, 116th Cong. § 501(a)-503(a) (2020).

[8]Id.; see alsoAffordable Care Act Provision 9010 – Health Insurance Providers Fee, I.R.S. Pub., https://www.irs.gov/businesses/corporations/affordable-care-act-provision-9010

[9] Colo. Rev. Stat. Ann. § 10-16-1205(1)(a)(I) (West 2020).

[10] Colo. Rev. Stat. Ann. § 10-16-1205(1)(b)(I)-(V) (West 2020).

[11] Del. Code. Ann. tit. 18, § 8703(b) (West 2019).

[12] Del. Code. Ann. tit. 18, § 8701(3) (West 2019).

[13] Del. Code. Ann. tit. 18, § 8702(b)-(c) (West 2019).

[14] Del. Code. Ann. tit. 18, § 8703(a), (h) (West 2019).

[15] Delaware Dept. of Ins., Domestic and Foreign Insurers Bull. No. 113, https://insurance.delaware.gov/wp-content/uploads/sites/15/2019/12/domestic-foreign-insurers-bulletin-no113.pdf.

[16] Md. Code Ann., Ins. § 6.102.1 (West 2020).

[17] Md. Code Ann., Ins. § 6.102.1(a)(1) (West 2020).

[18] Md. Code Ann., Ins. § 6.102.1(c)(2) (West 2020).

[19] Md. Code Ann., Ins. § 6.102.1(a)(2) (West 2020).

[20] Md. Code Ann., Ins. § 6.102.1(b) (West 2020).

[21] N.J. Stat. Ann. § 17B:27A-66 (West 2021).

[22] N.J. Stat. Ann. § 17B:27A-65 (West 2021).

[23]Id.

[24] N.J. Stat. Ann. § 17B:27A-67(a) (West 2021).

[25]Id.

[26] N.J. Stat. Ann. § 17B:27A-65 (West 2021).

[27] David R. Scrase, M.D., & Nicole Comeaux, J.D., M.P.H., Hum. Serv. Dept. (presentation to Legislative Health and Human Services Committee, Sept. 4 2020), p. 22, https://www.nmlegis.gov/handouts/LHHS%20090420%20Item%201%20A%20MAD%20Comeaux.pdf.

[28]Id.

[29]Id.

[30]Id.

[31]Health Insurance Coverage of the Total Population, N.M., Kaiser Family Foundation (2019), Health Insurance Coverage of the Total Population | KFF.

[32]Id.

[33] Russell Toal, Off. of Superintendent of Ins. (presentation of Superintendent of Insurance to Legislative Health and Human Services Committee, Sept. 4, 2020), p. 5, https://www.nmlegis.gov/handouts/LHHS%20090420%20Item%203%20OSI%20Toal.pdf.

[34] N.M. Stat. Ann. § 7-40-3(A), (D) (2018) (amended by 2021 N.M. Laws Ch. 65 (H.B. 98).

[35] S.B. 317, § 2(E), 55th Leg., 1st Sess. (N.M. 2021).

[36] NAIC, Retaliation: A Guide to State Retaliatory Taxes, Fees, Deposits and Other Requirements, Vol. 1 (Dec. 2020), https://content.naic.org/sites/default/files/publication-ret-zu-retaliation-volume-one.pdf.

[37] LFC, Fiscal Analysis Report, S.B. 317 (Apr. 2021), p. 10, https://www.nmlegis.gov/Sessions/21%20Regular/firs/SB0317.PDF.

[38] 42 C.F.R. § 433.68(b) (2008).

[39]Id.

[40] 42 C.F.R. § 433.55(a) (2008).

[41] 42 C.F.R. § 433.68(c)(1) (2008).

[42] LFC, Fiscal Analysis Report, S.B. 317 (Apr. 2021), https://www.nmlegis.gov/Sessions/21%20Regular/firs/SB0317.PDF.

[43]Id.

[44] S.B. 317, § 3(B), 55th Leg., 1st Sess. (N.M. 2021).

[45] S.B. 317, § 4(A), 55th Leg., 1st Sess. (N.M. 2021).

[46] S.B. 317, § 5(A)(1), 55th Leg., 1st Sess. (N.M. 2021).

[47]Id.

[48] S.B. 317, § 5(A)(2), 55th Leg., 1st Sess. (N.M. 2021).

[49] S.B. 317, § 5(B), 55th Leg., 1st Sess. (N.M. 2021).

[50]Id.

[51]Id.

[52] S.B. 317, § 3(C), 55th Leg., 1st Sess. (N.M. 2021).

[53] S.B. 317, § 2(F), 55th Leg., 1st Sess. (N.M. 2021).

[54]Id.