A proposed tax hike on HMO health insurance plans that would raise money to help the state pay for Medicaid has advanced through committees in the Iowa House and Senate.
Iowa’s health insurance tax on health maintenance organizations, or HMOs, would increase from the current rate of 0.925% to 3.5%, from Jan. 1 to Sept. 30 of this year. State insurance department officials said that would raise an additional $204 million this year for Medicaid as the state faces an estimated $91 million Medicaid funding shortfall this fiscal year, and a $168 million deficit next year.
Gov. Kim Reynolds said the One Big Beautiful Bill Act signed by President Donald Trump last year authorized this tax increase.
“We have a Medicaid shortfall,” Reynolds said. “I mean, that’s the main driver of this, and that would help address that. It’s pretty significant.”
Insurance and business group lobbyists criticized the proposal (HF 2739) as it advanced through the Appropriations Committee on Monday and the Senate Ways and Means Committee last week. They said the retroactive tax is unfair and would make Iowans’ health insurance more expensive.
Brandon Geib, lobbyist for Wellmark Blue Cross and Blue Shield, said the company’s HMO would be hit with a $24 million tax increase this year. He said the money would all go into Medicaid, which Wellmark does not participate in.
“I hear up here a lot how expensive health insurance rates are getting, how they keep going up,” Geib said. “It’s bills like this that do that.”
Most of the revenue generated by the tax increase would be paid by companies that are paid by the state to operate as managed care organizations for Iowa Medicaid.
Most of the revenue generated by the tax increase would be paid by companies that are paid by the state to operate as managed care organizations for Iowa Medicaid.
Rep. Gary Mohr, R-Bettendorf, said that as the state faces a $600 million Medicaid shortfall over the next five to seven years, it’s only fair for insurance companies to chip in by paying higher taxes.
“Why should the taxpayers of Iowa have to fund the full $600 million shortfall when insurance companies make profits at this, and they ought to be at the table, making a contribution to this as well?” he asked.
Matt McKinney, a lobbyist for the Federation of Iowa Insurers, said the insurance industry now accounts for 11% of Iowa’s GDP, in part because the state Legislature has previously worked to lower the insurance premium tax. He said this tax increase “dramatically changes that direction.”
“We ask that you not disrupt the decades of work that the state has done to bring and grow this industry in Iowa with a nine-month kind of fix that you’re trying to put in place by driving up the HMO tax,” McKinney said.
He said the tax hike is one-time money that won’t fully fix an ongoing problem with Medicaid funding shortfalls. After the 3.5% tax expires, the bill would set the HMO tax at 0.95% going forward rather than the 0.9% rate that would take effect under current law.
Nate Ristow, president and CEO of the Iowa Taxpayers Association, said Iowans deserve consistency and certainty in tax policy.
“The message this sends to the whole of the business community is that when times get tough, this Legislature is done looking at ways to reduce the budget and will instead look to the taxpayers to fill that hole,” he said. “That is not a message that I think Iowa wants to send to businesses that are looking to grow and expand and move into Iowa.”
Rep. Shannon Lundgren, R-Peosta, said if insurance companies have other solutions, she wants to hear about them.
“We obviously have a problem we need to fix, and the problem really is the rising rate of the cost of Medicaid in Iowa and across the nation,” Lundgren said. “I get very frustrated with the big insurance industry, because I think you [insurance companies] contribute to some of this problem.”
Democrats have opposed the tax hike, saying it will get passed on to Iowans and make health insurance even more unaffordable.
“This is a point where we should be taking care of our Iowans instead of making health care even more costly, and that’s exactly what this bill does,” said Rep. Megan Srinivas, D-Des Moines.
House Democrats requested a public hearing on the bill, which is scheduled for 8 a.m. on March 18.
Lawmakers have said the bill would need to be passed and signed into law by the end of March, and then the proposed tax increase would be submitted for federal approval.
Transfers from the Taxpayer Relief Fund would change
The HMO tax bills would also make some changes to how Iowa’s Taxpayer Relief Fund (TRF) is used, but the House and Senate have different proposals.
The state is facing back-to-back budget deficits of more than $1 billion because of state and federal tax cuts, and some of the money to cover those budget gaps will come from the Taxpayer Relief Fund, which had $4 billion at the end of the previous fiscal year.
Under current law, half of each year’s budget gap can be paid from the TRF, with the other half covered by the state’s ending balance.
The House bill would add the amount expected to be transferred from the TRF each year to the spending limit set by Iowa law, effectively raising the amount that lawmakers can budget for state services. It would also transfer an additional $296 million from the TRF to the state’s general fund to help make up for revenue losses from tax cuts in the One Big Beautiful Bill Act.
The Senate bill (SF 2464) would allow 100% of the current fiscal year’s budget gap – nearly $1.4 billion – to be paid for with the TRF. Next year, 75% of the deficit would be covered by the TRF. After that, it would go back to 50% per year. Reynolds said she did not propose this section of the Senate bill.
