The Affordable Care Act includes a provision that requires the health insurance industry to pay a fee totaling $8 billion in 2014, growing to $14.3 billion in 2018, and then indexed to premium growth. Health insurers will pay a portion of that fee based on their market share. For-profit insurers who provide Medicaid managed care programs are subject to the fee.

Milliman released a study on the impact of the fee on state Medicaid programs in January. Washington is one of 39 states and territories that operates a full-risk capitated Medicaid managed care program. (This means that the state contracts with managed care organizations — MCOs — to provide services in exchange for a set per member per month payment.) According to the study, “With recent state budget pressures, many states are expanding enrollment in existing or new Medicaid managed care programs.” Those include Washington. The study estimates that “the nationwide Medicaid managed care penetration rate will increase from 51% in 2011 to approximately 57% in 2013.” (According to the Medicaid Health Plans of America, Washington’s rate in 2011 was 88.1 percent.)

The health insurer fee is not tax deductible, so a Medicaid managed care payments will have to include an amount to cover the health insurer fee and an amount to cover the federal income tax impact. The study estimates that “every $1.00 of health insurer fee paid by a for-profit MCO will need to be funded at $1.54 . . . to keep the net financial impact on the for-profit MCO at zero.”

Because the ACA health insurer fee is a federal tax, all tax revenue collected as a result of the fee will accrue to the federal government. Since Medicaid is funded by the state and federal governments, both governments share in funding the premium component that funds the tax. This situation results in the federal government taxing itself and taxing state governments to fund the higher Medicaid managed care premiums required to fund the ACA health insurer fee, with no net financial impact to Medicaid MCOs.

The table above shows an example federal/state split. In Washington’s case, 91 cents would come from the federal government and 63 cents would come from the state.

Regarding premiums,

The impact will vary by state based on the characteristics of the MCOs in each state’s Medicaid managed care program. In general, states that contract with more nonprofit MCOs will pay a lower health insurer fee.

Thus,

The treatment of nonprofit MCOs in the health insurer fee calculation may distort the competitive balance between for-profit and nonprofit MCOs, creating a situation where state governments would incur the additional cost of funding increased Medicaid managed care payments if they contract with for-profit MCOs.

Approximately 42% of nationwide Medicaid managed care premiums in 2011 were paid to nonprofit MCOs. . . .

On average, states can expect that their Medicaid managed care premiums will increase 1.6% because of the ACA health insurer fee. States that contract exclusively with for-profit Medicaid MCOs can expect that their Medicaid managed care premiums will increase by up to 2.8% in any particular year. Given Medicaid managed care profit margins were less than 2% in CY 2012, increases of this magnitude are meaningful.

The total public spending impacts of the fee depend on how many states expand Medicaid. The report considers a baseline expansion, in which 26 states are expanding Medicaid (the lay of the land as of Jan. 2014; in March, New Hampshire also decided to expand); a moderate expansion, in which six additional states expand; and a full expansion by all states. Under the baseline expansion, over 10 years, states would spend $13.9 billion and the federal government would spend $22.5 billion. Under the moderate expansion, states would spend $13.6 billion and the federal government would spend $24.1 billion.

Under the baseline expansion, Washington’s Medicaid managed care premiums are estimated to increase by 1.5 percent over 2014-2018 and by 1.6 percent over 2019-2023. Over 2014-2018, state funding is estimated to increase by $91 million. Over 2019-2023, state funding is estimated to increase by $134 million.

A Daily Caller story last week reports that

The Obama administration still hasn’t directed states on how to pay for $37 billion in Obamacare taxes that will hit state Medicaid programs and potentially put them afoul of federal law, according to a letter from an industry trade group.

The Medicaid Health Plans of America is asking the Centers for Medicare and Medicaid Services to clarify whether state taxpayers must foot the bill for billions in Obamacare’s new taxes on Medicaid plans. If not, Medicaid plans will be at risk for failing to meet federal requirements and could be pushed out existence.

If there are no changes, it looks like legislators will have to find an extra $225 million in the state budget over the next 10 years.