Healthcare Economy

Fitch Ratings Weighs In on the ACA

Chris Lange

An omnibus spending bill signed into law on December 18 provides U.S. health insurers with a short-term reprieve by delaying the levy of three key Affordable Care Act (ACA) corporate taxes on the industry. And one key credit rating agency decided to weigh in on it.

The law earmarks $1.1 trillion in fiscal 2016 appropriations for multiple federal programs and casts uncertainty on whether health insurers that become beneficiaries of ACA’s key risk sharing programs will ever see full claims benefits.

According to Fitch:

Some health insurers have already booked material receivables due from the risk corridor program. The program’s collections through September had netted just $362 million on insurer reimbursement requests of $2.87 billion – meaning that there is only 13 cents available on each claim dollar submitted for the 2014 calendar year. As for each ACA risk-sharing program, there is some potential for becoming federally backstopped. However, with the Omnibus bill’s passage, such backstops appear unlikely, at least until the next US administration is in place.

Both the tax delays and the blockage of appropriations to the risk corridor program were driven by congressional wrangling over the future of the ACA. While less tax is well received by health insurers, smaller insurers could be most severely impacted if the risk corridors program is gutted further. It is unclear whether the tax delays also could hurt funding for ACA risk sharing programs. Risk-sharing programs were intended to reduce various forms of adverse selection risk, stabilize premium rates and promote exchange-based competition. They serve as a safety net for those health insurers needing loss-absorbing capacity when new enrollees (many with limited health histories) result in higher than expected claim activity.

The agency detailed that the taxes delayed under the omnibus package include Health Insurance Industry Tax (HIIT), the High Cost Employer-Sponsored Healthcare Coverage Excise Tax (the so-called Cadillac tax, delayed for two years) and a 2.3% excise tax on medical device manufacturers (two-year suspension, eligible for reinstatement in the Jan. 2018 fiscal year).

Fitch also noted:

The HIIT is the largest tax in the group, and the only one already in place. Apportioned on insurers by share of premiums written, it was a source of $8 billion in government revenue in 2014 and steps up annually to $14.3 billion by 2018. Most health insurers pass the HIIT tax on to their members, adding several percentage points of cost to the premium. The 2017 tax reprieve on HIIT and the 2017 and 2018 reprieve on the Cadillac tax help make insurance policies more affordable, but do not necessarily result in economic benefit for the insurers.