Iowa Medicaid temporary tax plan draws sharp opposition

DES MOINES — Insurance industry representatives and Iowa Medicaid recipients voiced strong opposition during testimony on legislation aimed at closing a growing state Medicaid budget shortfall.

What's being proposed: a temporary tax increase on health insurers and additional withdrawals from a state reserve fund to offset impacts on the state's budget from federal tax cuts contained in the Republicans' "One Big Beautiful Bill" Act.

House Democrats requested Wednesday's public hearing to give the public more time to weigh in on the proposal after it was introduced March 13. House File 2739 advanced out of the House Appropriations Committee Tuesday on a 14-10 vote and could reach the House floor as soon as Thursday.

Supporters argue the approach ensures Medicaid services can continue for those most in need without long-term tax increases. Opponents counter that even a temporary hike will raise costs for employers and individuals already struggling with health care expenses.

A similar bill, Senate File 2464, is eligible for a floor vote in the Senate.

Insurers warn of higher premiums

The proposal would impose a one-time tax increase on health insurance providers, known as health maintenance organizations. Insurance industry officials and business advocates overwhelmingly opposed the bill, arguing the temporary tax increase would ultimately be passed on to consumers through higher premiums.

Scott Sundstrom, representing Wellmark Blue Cross and Blue Shield, said the measure would translate into significant out-of-pocket costs for policyholders.

Sundstrom said the proposed tax increase — which is retroactive to Jan. 1 — would total about $24.2 million for Wellmark's HMO.

"That money will be passed on to Iowans, as all taxes are and always have been," he said. "So 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.

He estimated the change would add roughly $115 per covered individual this year, or nearly $500 for a family of four — costs he said would come as an unexpected burden.

Sundstrom warned the approach outlined in the bill could exacerbate affordability challenges in an already expensive health care system.

"We understand that the federal laws and regulations around this are very complicated," he said. "But we are committed to working together with you to find a solution."

Iowa Insurance Commissioner Doug Ommen on Wednesday provided a technical overview of the proposal, emphasizing that the tax increase would be temporary and limited in scope.

Ommen noted that lawmakers in 2023 approved a phased reduction in the state's insurance premium tax, lowering it from 1 percent to 0.9 percent by 2027. Under the current bill, the HMO tax would rise for nine months before settling at 0.95 percent — roughly in line with recent levels.

"With these numbers, Iowa will remain competitive with other states and will operate with one of the lowest tax rates in the country," Ommen said.

He also pushed back on claims that the tax would automatically be passed on to consumers, stressing that the tax applies directly to insurers, not policyholders or businesses.

"If the costs associated with this tax are passed to business customers, that will be within the business decision of the HMOs," Ommen said.

Ommen added that, under current law and actuarial review requirements, insurers cannot incorporate those costs into individual or small group market rates this year, though he acknowledged companies could shift costs in other parts of their business.

Business and industry representatives said those costs would inevitably ripple outward.

JD Davis of the Iowa Association of Business and Industry argued that, in practice, insurers would recover the tax through customers.

Insurance broker and small business owner Eric Kohlsdorf echoed that concern, arguing that higher taxes would inevitably be reflected in premiums and benefit decisions. He warned that businesses — particularly small and rural employers — could be forced to raise prices or scale back employee benefits to absorb the added costs.

"In a time when our economy is still recovering, and employers are at a breaking point of absorbing higher and higher costs on health care, we should not burden our families or our individuals or our businesses with new taxes," Kohlsdorf said.

Laura Patton, a small-business owner and insurance agent, provided specific examples of how premiums could rise. She said a typical small group plan could see costs increase by nearly $3,000 annually, while some individuals could face hundreds more per year.

State officials defend plan

State officials and some lawmakers framed the bill as a necessary step to stabilize Medicaid funding without cutting services to vulnerable Iowans, including the elderly and those with disabilities.

Iowa Medicaid Director Lee Grossman said the proposal would generate about $123 million in one-time revenue and help cover a $70.3 million shortfall in the current fiscal year.

"This represents a way to bring in some one-time revenue for what is obviously a very, very concerning budget shortfall," Grossman said. He added that similar financing mechanisms are used in roughly half of the U.S. states and would help avoid "reductions or cuts to vulnerable Iowans."

Lawmakers backing the bill have pointed to projections showing a $90.6 million Medicaid deficit this fiscal year, growing to $167.6 million in fiscal year 2027.

Rep. Gary Mohr, R-Bettendorf, who chairs the House Appropriations Committee, said over the next five to seven years, the Medicaid deficit will reach about $600 million.

"Why would the taxpayers of Iowa have to fund $600 million of expenses for Medicaid and those who make a profit in this business, the insurance companies, collect the profits but pay nothing to that $600 million?" he said during Tuesday's House committee meeting. "I don't think that's fair for the taxpayers of Iowa."

Medicaid recipients fears cuts

Medicaid recipients and advocates also raised concerns about broader issues within Iowa's privatized Medicaid system.

Zach Mecham, a Pleasantville resident and Medicaid recipient with a disability who is running for the Iowa Senate, warned lawmakers that repeated shortfalls signal deeper structural problems.

"We're robbing Peter to pay Paul," Mecham said, arguing the state has continued to delay more comprehensive fixes. He described troubling interactions with his managed care organization, including being asked whether doctors had tried to wean him off a ventilator he depends on to breathe.

"Only an organization that is desperate to cut services would ask that of someone like me," he said. "So I'm worried that if we don't solve these budget issues, which, frankly, I think means getting rid of privatized Medicaid, we're going to see more and more increases on their costs, and those costs are trickled up to us in the form of service cuts."

Other speakers raised concerns that increasing taxes without broader reforms could worsen care access or affordability.

Molly Buck, a Wellmark customer, former state lawmaker and cancer survivor from Ankeny, urged lawmakers to reject the bill. Buck called the proposal "a passthrough tax on private insurance holders" and said it would add to the financial pressures already facing patients dealing with serious health conditions.

She criticized the legislation as a temporary fix that lacks broader reforms or accountability measures for managed care organizations.

"Instead of fixing the leak, you're asking cancer patients like me … to bail out a sinking boat," Buck said, urging lawmakers to find a solution that does not "balance the budget on the backs of Iowans who are already fighting for their health."

What the bill does

The legislation combines two major policy elements: a temporary increase in the health maintenance organization (HMO) tax — from 0.925 percent to 3.5 percent between Jan. 1 and Sept. 30 of this year. Beginning Oct. 1, the tax would lower to 0.95 percent.

It also expands use of the state's Taxpayer Relief Fund to offset budget pressures tied in part to federal tax changes under the One Big Beautiful Bill Act.

Iowa's revenues are expected to decline due to the state's tax code being tied to federal law. Republicans say they back the federal tax cuts.

The state's Taxpayer Relief Fund currently sits at about $4 billion.

Rep. Ann Meyer, R-Fort Dodge, said the bill could reach the House floor as soon as Thursday, though she noted the exact timing remains uncertain until lawmakers meet in caucus.

Meyer said testimony during Wednesday's hearing did not change her position, noting lawmakers have heard similar concerns before. She defended the proposal as a temporarily measure to preserve Medicaid services for people who rely on them by funding a gap driven in part by a reduced federal match rate following the end of COVID pandemic-era support.

"We do need a temporary fix. We do need to fill this hole," Meyer said. "We have plenty of money in the general fund to do it, but we also expect the companies that provide care to pitch in as well."

Meyer said 49 of 50 other states use higher HMO taxes, as allowed by federal law, that were being discussed in the bill. She said the legislation does not increase health care provider taxes or decrease reimbursement rates for providers, and emphasized the measure does not require insurers to raise premiums.

"They would be making that decision on their own," she said.

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