H.R. 3590: Raising Taxes on Small Business
The “Health Insurance Fee:”
A Tax on Small Businesses and the Self-Employed
Small business has consistently said that controlling the increasing costs of health insurance premiums is their No.1 concern and needs to be the focus of health reform legislation. The health insurance tax included in the Patient Protection and Affordable Care Act (H.R. 3590) would raise the cost of small business health insurance premiums. The health insurance fee, which is levied on health insurance companies, would be almost entirely passed on to the consumers in the fully insured marketplace, where nearly all small business and self-employed purchase their coverage. This new tax on small business will raise insurance costs for already struggling small businesses and is contrary to the goals of health reform.
How does the tax work?
Messaged as a “health insurance fee,” this tax is actually a direct tax on small business.
H.R. 3590 assesses a $6.7 billion annual tax on all health insurance companies based on their “net premiums” written. The amount of the $6.7 billion annually that the insurance company would be responsible for is equal to the percent of the market that the insurance company covers. The larger the insurance companies market share, the higher their annual health insurance tax. One thing insurers have made clear throughout the healthcare debate: new taxes on them mean new costs passed along to customers. The group that experiences the most cost-shifting is the fully insured market.
How does this new tax increase the cost for small business?
- A health insurance company is defined to specifically exclude employers that self-insure. Most small business owners do not self-insure because they do not have a large enough pool of employees. Instead, small employers purchase health insurance in the fully-insured market. Because the self-insured plans are exempted from the tax for purposes of determining the insurance company’s portion of the $6.7 billion in fees, the only insurance plans that factor into the equation are fully-insured plans – the plans that 87 percent of small business owners purchase.
- While the fees are assessed on the insurance company, those companies have two choices: either eat the costs or pass the costs on to their customers. Because this fee will eat into the bottom line of the company, they will certainly pass these costs along to their customers. A recent CBO report confirms that the small business insurance tax “would be largely passed through to consumers in the form of higher premiums for private coverage.” And a study by the Federal Policy Group found that the amount of taxes passed on to the typical family of four in their health insurance premiums could be as much as $500 per year.
Customers that will pay for these increased costs are the same small business owners who have been asking for health insurance reform that reduces their costs.