Iowa House backs temporary tax hike to fill Medicaid gap

DES MOINES — A temporary tax increase on some health insurers advanced by Iowa lawmakers would ultimately raise health care costs for employers and families already struggling with rising premiums, insurance industry officials and business advocates warned, arguing the burden will be passed directly on to consumers.

Supporters say the measure is a necessary, short-term step to preserve Medicaid services for vulnerable Iowans without imposing permanent tax hikes.

The Iowa House approved the proposal Thursday on a 53-40 vote, sending it to the Senate.

A temporary tax to plug a widening gap

At the center of the legislation is a one-time increase in the tax applied to health maintenance organizations, or HMOs — insurers that manage care for Medicaid recipients and private customers alike.

Under House File 2739, the HMO tax would jump from 0.925% to 3.5% for the first nine months of 2026, applied retroactively to Jan. 1. Beginning Oct. 1, the rate would drop to 0.95%.

Republican lawmakers say the temporary increase is designed to maximize federal matching funds while Iowa still has a narrow window to adjust its tax structure under new federal rules.

Those rules, finalized by the Centers for Medicare & Medicaid Services and tied to provisions in congressional Republicans' One Big Beautiful Bill Act signed into law last year, limit states' ability to raise certain provider taxes after early April.

Rep. Shannon Lundgren, R-Peosta, who managed the bill on the House floor, said the change is necessary to preserve funding for Medicaid without cutting services.

"If we don't do this slight increase for a short nine-month period of time, we lose federal funds," Lundgren said. "Why should those funds go to other states when they could be supporting Iowans?"

Supporters argue the approach is a pragmatic, time-limited solution that avoids permanent tax increases while helping stabilize Iowa's Medicaid program.

Mounting Medicaid pressures

State officials have warned that Iowa's Medicaid budget is increasingly strained, driven in part by the expiration of pandemic-era federal aid and a reduction in the federal government's matching rate.

Current projections show a $90.6 million shortfall in the current fiscal year, growing to $167.6 million by fiscal year 2027. Over the next five to seven years, the gap could reach roughly $600 million, according to Rep. Gary Mohr, R-Bettendorf, who chairs the House budget committee.

Lawmakers backing the bill say failing to act now would likely force deeper cuts later — including to services relied upon by some of the state's most vulnerable residents.

"This bill is funding a Medicaid system … that takes care of our most vulnerable people in the state of Iowa," Lundgren said.

The tax increase is expected to generate additional revenue while also allowing Iowa to draw down an estimated $124 million in federal matching funds.

Concerns about higher premiums

Opponents, however, argue the costs of the tax increase will not be absorbed by insurers but passed directly on to consumers in the form of higher premiums.

Insurance industry officials, taxpayer and business groups largely opposed the proposal during a public hearing Wednesday requested by House Democrats.

Scott Sundstrom, representing Wellmark Blue Cross and Blue Shield, told lawmakers during a Tuesday public hearing the change would have immediate financial consequences for policyholders.

"That money will be passed on to Iowans, as all taxes are and always have been," Sundstrom said. "I'm not here talking today about the cost Wellmark would have to pay. I'm talking about the cost that Iowans have to pay in increased taxes on their health care costs."

Sundstrom said the retroactive tax increase would total about $24.2 million for Wellmark's HMO alone — roughly doubling its current tax liability. He estimated that could translate to about $115 per covered individual this year, or nearly $500 for a family of four.

Democrats warn of affordability crisis

For many Iowans already facing rising health care costs, critics say, that increase could be significant and unexpected.

Rep. Dave Jacoby, D-Coralville, was blunt during floor debate: "Every single Iowan will pay a new tax for this bill."

Democratic lawmakers repeatedly warned the measure could exacerbate affordability challenges in a state already grappling with rising insurance premiums and broader economic pressures.

Rep. Megan Srinivas, D-Des Moines, said constituents have been struggling with higher costs across the board — from groceries to farm equipment — and warned the bill would add to that burden.

She pointed to data showing that two-thirds of Iowans saw insurance premium increases in the past year, with some forced to drop coverage altogether.

Rep. Austin Baeth, D-Des Moines, echoed concerns that the tax would ultimately lead to more uninsured residents.

"When the price of that health insurance goes up, one of two things happens," Baeth said. "Either Iowans will strain to pay for that premium with their already stretched budget, or they'll no longer be able to afford insurance at all."

Rep. Josh Turek, D-Council Bluffs, called the measure a short-term fix to a deeper structural problem.

"This bill is putting a Band-Aid on an amputation," Turek said. "We are not fixing a broken system. We are adding weight to one that is already collapsing."

Republicans defend approach

Republicans countered that insurers' decisions — not state policy — ultimately determine premium increases, noting that premiums rose in recent years even after lawmakers reduced the HMO tax.

"What I can tell you is, when we lowered the premium tax a few years ago, they raised premiums. That's on them," Lundgren said. "That's a business decision that Wellmark Blue Cross and Blue Shield makes."

She also pointed to strong financial performance within the insurance industry, arguing companies are capable of absorbing some of the costs. According to Lundgren, insurers generated billions in revenue and hundreds of millions in profits in recent years, even as premiums climbed.

She added that lawmakers do not set insurance premiums and cautioned against relying on industry warnings, saying companies were "scaring your constituents" into believing the Legislature would directly increase their health care costs.

Lundgren framed the decision as a choice between siding with insurers or preserving services for vulnerable Iowans.

Drawing from reserves

In addition to the tax increase, the legislation expands the use of Iowa's Taxpayer Relief Fund — a reserve account built up in recent years — to help offset broader budget pressures.

The fund currently holds about $4 billion.

The bill increases a planned transfer from the fund by $50.8 million, bringing the total to $347 million. It also raises a separate general fund appropriation for Medicaid supplemental funding to $89 million.

Much of that spending is tied to anticipated revenue losses resulting from federal tax changes under the One Big Beautiful Bill. Because Iowa's tax code is linked to federal law, changes at the federal level are expected to reduce state revenues.

Republicans, who broadly support the federal tax cuts, say using the reserve fund is an appropriate way to manage the transition without reversing those policies.

The legislation also includes guardrails limiting how much can be transferred from the fund, tying it to revenue estimates produced by the state's Revenue Estimating Conference. Additional provisions require that, beginning in fiscal year 2028, such transfers be factored into state spending limits — though that requirement is set to expire in 2029.

Federal timing adds urgency

The push to pass the bill now is driven in part by federal deadlines.

Under new CMS rules, states have until March 31 to enact and submit changes to provider taxes in order to qualify for enhanced federal matching funds. After that, new restrictions will limit states' ability to increase such taxes.

State officials say Iowa's current HMO tax rate — among the lowest in the country — leaves money on the table compared to other states that use higher rates to draw down federal funds.

Senate Majority Leader Mike Klimesh, R-Spillville, said the policy is one of the few available tools to address Medicaid funding gaps.

"Every state is encountering Medicaid issues, Medicaid shortfalls," Klimesh told reporters. "The federal government makes this opportunity available for us to draw down additional dollars."

Still, he acknowledged concerns about potential cost increases for private insurance customers, saying discussions will continue as the Senate takes up the bill.

Narrow passage

The bill's passage in the House was narrow, with 10 Republicans joining all Democrats in opposition — a sign of unease within the majority party over raising taxes, even temporarily.

Democrats offered several amendments rejected by Republicans aimed at reshaping the proposal.

Among those voted down were measures to create a state-based health insurance subsidy, prohibit premium increases tied to the tax, and redirect other state resources — including requiring the sale of a state-owned airplane — to help fund Medicaid. Another amendment would have increased lawmakers' own health insurance premiums to offset costs.

Democrats argued the changes would either shield Iowans from higher premiums or provide alternative funding sources without raising what they described as a new health care tax.

Republicans, however, said the amendments failed to address the urgency of securing federal matching funds within a narrow timeline and could jeopardize the state's broader budget framework.

One amendment would have frozen any health care premium increases for health benefit plans offered by insurance companies in the state for five years, beginning in 2027. Lundgren read a letter from Wellmark Blue Cross and Blue Shield that warned if the amendment was adopted, the health insurance carrier "would be forced to withdraw from all lines of insurance in Iowa," resulting in 1.6 million Iowans losing their health care coverage.

As the legislation moves to the Senate, lawmakers face the same fundamental tension: how to sustain Medicaid for those who rely on it while minimizing the financial impact on everyone else.

For many Iowans, the outcome could shape both their access to care and the cost of keeping it.

Gazette Des Moines Bureau Chief Erin Murphy contributed to this report