Gov. Kim Reynolds signed a bill into law Thursday that raises the tax on HMO health insurance plans to generate more money for Iowa’s Medicaid program.
Under the new law (HF 2739), the tax rate paid by some insurance companies will increase from 0.925% to 3.5% from Jan. 1 of this year through September, pending federal approval. In October, it will drop to 0.95%. Democrats and insurance companies have warned the tax hike will get passed on to Iowans in the form of higher health insurance premiums.
Reynolds said at a news conference Wednesday that Iowa is facing growing Medicaid budget deficits. She said she looked at several options to help fill the gap, including her failed proposal to raise the tobacco tax.
“This, right now, looks like probably the most feasible way that we can do that without starting to hurt some of the individuals that are receiving the services, because that would mean taking some of them away,” Reynolds said.
The latest state estimates show a $91 million Medicaid funding shortfall this fiscal year and a $168 million deficit next year.
Medicaid is a health care program for low-income Iowans and people with disabilities. The latest state estimates show a $91 million Medicaid funding shortfall this fiscal year and a $168 million deficit next year.
“It’s official: the majority party is raising taxes and raising the cost of Iowans’ health care,” said Sen. Molly Donahue, D-Marion. “This tax hike will be passed on to farmers, small business owners and Iowa families whose health care costs are already on the rise, all in an effort to drum up new revenue to fill the massive budget deficit hole that Republican lawmakers created.”
Reynolds said the temporary tax hike will allow the state to access more federal funding for Medicaid as Iowa is seeing a higher level of health care needs following the COVID-19 pandemic. She said private insurance companies have seen significant profits, and they don’t have to pass the cost on to Iowans.
“That’s always the threat,” Reynolds said. “Every time we try to rein in or hold our insurance companies kind of in line, that’s the first place that they go.”
She said insurance companies didn’t reduce premiums when the state cut health insurance taxes.
The new law also includes $89 million for this fiscal year’s Medicaid budget, and it transfers $347 million from the state’s Taxpayer Relief Fund to the general fund.
Republican leaders said the transfer from the Taxpayer Relief Fund is needed to make up for revenue reductions caused by tax cuts in the One Big Beautiful Bill Act. Iowa automatically adopts some federal tax changes, and tax cuts for tips, overtime and other One Big Beautiful Bill provisions have contributed to Iowa’s overall budget deficit.
Reynolds signed the bill into law about three weeks after it was first introduced in the Iowa Senate. Lobbyists and other Iowans who spoke at several subcommittee meetings and a public hearing criticized the bill throughout the process.
“At a time when so many Iowans are struggling with rising health care costs, why are legislative Republicans so determined to make things worse?” asked Senate Minority Leader Janice Weiner, D-Iowa City. “Iowans shouldn’t have to pay the price for the majority party’s budget mismanagement.”
More than a dozen Republican lawmakers ultimately joined Democrats in voting against the bill. It passed the House with a 53-40 vote, with 10 Republicans voting no.
The bill had just enough votes to pass the Senate 26-19, where four Republicans voted against it.
