Iowa Senate sends health insurer tax increase to governor’s desk

A bill seeking to address Iowa Medicaid's budget shortfall through a retroactive tax increase on health maintenance organizations for the first nine months of 2026 has made it to Gov. Kim Reynolds' desk as it passed the Iowa Senate on Tuesday.

House File 2739, passed 26-19, would raise the tax rate on premiums for health maintenance organizations, or HMOs — certain Medicaid Advantage plans offered by private companies. The rate would rise from 0.925% to 3.5%, retroactively applying Jan. 1 and Sept. 30, 2026. After this period, the HMO tax rate would fall to 0.95%, slightly higher than the current rate.

In addition, the bill would transfer almost $350 million from Iowa's Taxpayer Relief Fund to make up for state revenue loss due to tax cuts made through the "One Big Beautiful Bill" act. The measure stipulates that $89 million from the state's general fund will be transferred to the Iowa Department of Health and Human Services for the state's Medicaid program. The Medicaid Forecasting Group found Iowa Medicaid is expected to face a $90.6 million deficit in Fiscal Year 2026.

Republicans supporting the bill have argued these changes are needed both to provide Iowa sufficient funding to account for tax cuts and take advantage of federal funding opportunities provided through the federal 2025 measure.

But advocates representing health care insurance companies and others say the measure will lead to increased health insurance costs for Iowans. Scott Sundstrom, a lobbyist for Wellmark, Inc., told lawmakers during a House public hearing on the bill the tax increase will result in a $500 hike in health insurance costs for a family of four receiving coverage through Wellmark's HMO.

Senate Democrats repeated this criticism during floor debate Tuesday, saying the tax increase on HMOs ultimately resulted in a tax increase on Iowans through higher health care premiums. Sen. Molly Donahue, D-Marion, said arguments put forward by GOP supporters of the bill that the tax will not necessarily raise health care costs for Iowans are incorrect.

"Anyone who has even a basic understanding of how insurance markets function knows exactly what's going to happen next," Donahue said. "Those costs are not going to be absorbed by the insurance companies. They are passed directly on to the people. That means higher premiums for families, higher costs for small businesses who are trying to provide coverage, higher out-of-pocket expenses for families.

During House debate on the bill, Rep. Shannon Lundgren, R-Peosta, had emphasized insurers, not lawmakers, set the cost of health care premiums. Sen. Mark Costello, R-Imogene, made a similar argument.

"Premium taxes are the equivalent of a corporate income tax for insurance companies," Costello said. "It's not a tax on employers or employees covered by an insurance policy. A reduction in premium taxes does not automatically equate to a reduction in costs of health care."

He said though Iowa premium taxes were cut in 2024, Wellmark customers "still experienced a 14.73% increase in their HMO premium rates."

Costello said when premium taxes are reduced, there are two possible outcomes: "first, the insurance company profits increase by the amount of cut, or second, consumers could purchase insurance at a lower rate equal to the amount of cut." He also referenced a statement from Wellmark Blue Cross and Blue Shield provided to WHO 13 News saying "Wellmark has not yet made a business decision on whether, when or how we will pass along these added costs."

The measure has moved through the legislative process quickly. Meetings on the proposal began in early March, and the bill has moved in the past two weeks through the committee processes in both chambers. The Senate vote came just days after the Iowa House passed the bill in a 53-40 vote Thursday.

Reynolds has said the state faces a March 31 deadline in order to meet federal requirements for drawing down funding through the increased HMO tax rate.

Discussion on the bill in the Senate was slightly delayed, as the measure was deemed technically not eligible for consideration in the Senate this week under the Legislature's Joint Rule 20, as brought up by Senate Minority Leader Janice Weiner. However, the bill — Senate File 2464, which was amended and later substituted for the House bill — was made eligible for consideration as Republicans approved moving the measure to the "unfinished business" calendar.

Sen. Catelin Drey, D-Sioux City, criticized Senate Republicans for not abiding by the intention of the joint rule, limiting debate in the week after the second "funnel" deadline to only consider legislation which originated in the opposite chamber, alongside unfinished business.

"Iowans, I hope you are paying attention: For the first time, Senate leadership has broken the joint rules to force us to take up this bill," Drey said. "They are in such a hurry to raise your taxes that they couldn't follow their own rules. … No one, aside from the governor, has asked for this, and the lobby for the health insurance companies are on record saying that the tax increase will be passed through to small businesses, farmers and families who are already paying some of the highest premiums ever."

Donahue said the bill is an effort to clean up consequences of the Republican trifecta's decision to cut state revenues "without a sustainable plan" over the past decade.

"Instead of fixing the system, you're backfilling the gap on the backs of Iowans," Donahue said. "But here's what you seem to be counting on. You are counting on the fact that Iowans may not connect the dots. You are counting on the fact that this doesn't show up as a line item labeled 'tax.' You are counting on a delay, because the pain will show up later, long after today's vote. But I know Iowans are smarter than that. They will notice when their premiums go up. They will notice when their employers cut their coverage. They will notice when they have to choose between health care and groceries. And when they do, they're going to be looking at you."

Costello said projections from the state's Revenue Estimating Conference and the presence of existing surpluses through the Taxpayer Relief Fund, as well as the state's ending balance and reserve accounts show Republicans' sound budgeting practices. In addition to Iowa GOP-backed tax cuts to the state's income tax, he said the bill will allow Iowans to benefit from federal tax cuts on tips and overtime made through the 2025 federal law.

"All this shows the strong financial position Iowa's budget is in, to continue to govern and fund the priorities for our taxpayers," Costello said. "Don't be fooled by the minority party's rhetoric. We've become accustomed to their hyperbole and scare tactics."