Temporary tax hike to fill Iowa Medicaid gap heads to governor’s desk

DES MOINES — A temporary tax increase on some health insurers to help fill a Medicaid budget shortfall — a move Democrats and insurers say will ultimately raise health care costs for all Iowans — is headed to Iowa Gov. Kim Reynolds' desk.

House File 2739 passed the Iowa Senate, 26-19, on Tuesday. The bill would increase the tax applied to health maintenance organizations, or HMOs — a type of managed care health insurance plan that provides, manages and covers health care services through a specific network of doctors and hospitals.

Republicans defended the bill as a necessary and limited tool to stabilize Medicaid services for vulnerable Iowans and to draw down additional federal dollars.

Sen. Mark Costello, R-Imogene, pushed back on claims the measure will automatically raise premiums, noting that Iowa's largest insurer has raised rates even as its tax burden declined in recent years. He said the bill uses a federal financing tool adopted in other states to support Medicaid while keeping Iowa competitive, pointing out the state's provider tax rate remains the lowest in the country.

Costello also cited strong reserve balances — including a projected $1.5 billion ending balance, full rainy day funds and a $4 billion Taxpayer Relief Fund — as evidence of the state's fiscal health, arguing the temporary tax would generate hundreds of millions of dollars in fiscal 2027 without undermining broader tax-cut policies.

Concerns about higher premiums

Senate Republicans moved the bill forward after a procedural dispute.

Senate Democratic leader Janice Weiner, of Iowa City, raised a point of order, arguing the legislation was not eligible for debate under Joint Rule 20, which limits the types of bills that can be considered during the 11th week of a session. Republicans ultimately advanced the bill by reclassifying it as unfinished business.

Democrats sharply criticized both the process and the policy, arguing the measure amounts to a hidden tax increase that will ultimately be borne by Iowa families and businesses.

"This bill is a tax increase on Iowans, full stop," said Sen. Molly Donahue, D-Marion.

Donahue and other Democrats said higher insurer costs will translate into increased premiums, deductibles and out-of-pocket expenses for consumers already struggling with rising costs.

Sen. Catelin Drey, D-Sioux City, said the bill would raise costs "with no change in services or coverage," adding that industry representatives have indicated the tax would likely be passed on to customers.

"This is a marked increase in cost for Iowans with no change in services or coverage," Drey said. "Regular Iowans are screaming for expanded access to care without having to take out a second mortgage, and the majority party is telling them to pound sand."

A representative for Wellmark Blue Cross and Blue Shield told lawmakers during a public hearing last week the change would have immediate financial consequences for policyholders. He 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.

Donahue argued the measure shifts the cost of past budget decisions onto Iowa families, calling it a "bait and switch" that contradicts years of Republican messaging on tax relief and affordability. She said the policy deliberately raises out-of-pocket health care costs while masking the impact, describing it as "a cost-shifting scheme" and "a shell game" that ultimately forces working families and small businesses to absorb the burden of what she characterized as a decade of unsustainable fiscal policy.

"This is happening because Republican lawmakers have a budget mess on their hands," Sen. Art Staed, D-Cedar Rapids, said.

State budget projections show Iowa facing a roughly $1.2 billion gap between expected revenue and proposed spending for the next fiscal year, according to the nonpartisan Revenue Estimating Conference. For the second year in a row, the state is on track to spend over $1 billion more than the revenue it brings in, primarily due to state and federal tax cuts.

Republicans plan to cover the budget gap using money from the $4 billion Taxpayer Relief Fund. Democrats accuse them of mismanaging the state budget.

Senate Democrats also warned the policy could disproportionately affect federal marketplace enrollees, who have seen significant premium increases with the expiration of federal enhanced premium tax credits, and small businesses offering HMO coverage.

"We know health insurance is already outrageously expensive, and this bill makes it worse," said Sen. Janet Petersen, D-Des Moines.

What the bill does

HMO taxes would jump from 0.925 percent to 3.5 percent for the first nine months of 2026. The tax changes would take effect only after federal approval and would apply retroactively to Jan. 1. Beginning Oct. 1, the rate would drop to 0.95 percent.

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

Total revenue available to Medicaid is estimated to increase by about $172 million in the upcoming fiscal year and $16.4 million in fiscal 2028, according to an analysis by the nonpartisan Legislative Services Agency. That includes increased payments to managed care organizations, the private insurance companies contracted by the state to manage and coordinate health care services for the majority of Iowa Medicaid members.

The increase in MCO payments is estimated to be about $179 million in fiscal 2027 and $2.4 million in fiscal 2028, of which the state portion is $54.5 million in fiscal 2027 and $746,000 in fiscal 2028.

The bill also transfers nearly $350 million from the state's Taxpayer Relief Fund to account for state revenue declines caused by tax policy changes made through the federal One Big Beautiful Bill Act. Another $89 million would transfer from the state's general fund to the Iowa Department of Health and Human Services for the state's Medicaid program.

Republicans defend approach

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.

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.

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 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 will bring the investments that benefit our neighbors on Medicaid and those providing services to them," Costello said.