Sunday Talk: Stone on HMO’s

One of the biggest and most talked about pieces of legislation this past week has been HF 2739: Medicaid Assurance through HMO Tax Increase. There is a lot of misinformation and opinions being circulated. For this week’s newsletter, I would like to do a deep dive on the purpose of this bill and why it’s important.

Currently, Iowa insurance companies pay less than 1% in provider tax to the state. For calendar year 2026, the tax rate on insurance companies is 0.925%. This is one of the lowest, if not the lowest, provider tax in the country. Most states are somewhere between 2-4%.

This bill proposes an increase in the tax for nine months to 3.5%, which is the maximum allowable under the law, with the passage of the One Big Beautiful Bill Act (OBBBA). This is estimated to generate more than $250 million in additional funding, all of which would go toward Medicaid. To be clear, this is a tax on the insurance companies, NOT on Iowans. If the insurance companies choose to pass this tax on to the insured, that would be their decision. It’s worth noting that Wellmark had a net profit of more than $176 million in 2025. They could certainly absorb this temporary tax increase.

Big insurance is saying they will have to raise premiums to make up for the loss. But will they lower rates once the tax goes back down? Did you see lower premium rates over the last four years while we LOWERED their tax rate? Their story just doesn’t seem to add up.

This revenue is critical as Iowa—like the rest of the country—struggles with the rising cost of Medicaid. Without these funds, the state faces projected Medicaid deficits of approximately $90 million for Fiscal Year 2026 and $167 million for Fiscal Year 2027. This challenge is not unique to Iowa. The only thing that’s unique to Iowa is how low our tax rate is. Across the country, states are facing Medicaid fiscal pressure driven by the expiration of pandemic-era federal subsidies and the implementation of the OBBBA.

This HMO provider tax is a mechanism many states use to pull down matching federal dollars, and because the OBBBA put new restrictions on states’ ability to change those rates, many states are left with significant holes in state budgets. This is forcing many legislatures to consider benefit cuts or emergency tax hikes to maintain coverage.

Nobody likes to see their taxes go up. So I get why the insurance companies are pushing back as hard as they can. As Republicans, we don’t love raising taxes. However, when faced with a choice between protecting the insurance companies’ profits or health care for Iowans, we’re choosing to protect the health care of Iowans.

We are asking a multi-billion-dollar industry to contribute at a rate more in line with the rest of the country for just nine months. This isn’t a permanent tax hike; it’s temporary to ensure our most vulnerable—our seniors in nursing homes and Iowans with disabilities—don’t lose access to care.

Medicaid Costs Impact Other Areas of State Budget

Iowa’s Medicaid program consumes an ever-growing amount of the state’s budget. In the 1990’s, Medicaid generally took about 7 percent of the budget. Since the turn of the century, Medicaid spending has grown significantly. Last year, Medicaid accounted for 22 percent of the state’s budget.

This year, the state is also absorbing the end of extra federal Medicaid funding that was given to states due to Covid. That enhanced match ceased at the end of 2023, and the state has now exhausted those funds. So, the state budget must pick up the ongoing costs that the extra Federal funding had been covering.

Below is a chart showing Medicaid funding that comes from the state’s General Fund since 2018 and projected through 2031. This projects the cost of the program to grow by over $1 billion by the end of 2031.

Why is Medicaid spending going up?  There has been significant growth in the number of people on Medicaid.  In 1998, just over two hundred thousand Iowans were on Medicaid – one out of every 15 Iowans.  Today, there are six hundred thousand Iowans covered by Medicaid and the Iowa Health and Wellness Plan.  That means one out of every 5 Iowans is getting their health care coverage through Medicaid.  The health care needs of many of these Iowans are significant.

Why are so many Iowans covered by Medicaid?  The price of health insurance is a major driving factor in this.  Many Iowans either cannot afford to purchase health care on their own or their employer can’t afford the rates insurance companies charge them.  Another reason for the growth in enrollment is that many Iowans find the health insurance plans offered do not cover their health care needs.

If rates are that high, does that mean the insurance companies aren’t making money?  That certainly is not the case.  Just looking at Wellmark, Iowa’s largest insurance company, one can see how much money that one company is making.  Over the last five years, these are the net income figures Wellmark has reported to the Iowa Insurance Commissioner:

2021- $143,344,614
2022 – $82,368,021
2023 – $216,533,140
2024 – $181,019,246
2025 – $176,229,257

Over the last five years, Wellmark has had profits totaling $799.5 million.  And in 2023, the state passed a bill lowering the tax insurance companies pay.  Right now, they pay a tax that equals 0.95% of the insurance premiums they collect.  Needless to say, insurance companies are doing very well in Iowa.

Have the taxes on insurance companies gone up in recent years?  Actually, they have gone down.  In 2023, the state legislature passed a bill lowering the tax insurance companies pay to just 0.95% of the insurance premiums they collect.  Even with their tax bill going down, Wellmark still raised premiums for those on the company’s HMO plans by 14.73%.

Do health insurers pay any of their tax money to fund Medicaid?  Yes.  The three managed care companies that administer Iowa’s Medicaid program pay what is known as a provider tax.  This is a tax that is then matched by the federal government to help states fund Medicaid.  Some states have abused this, and Congress last summer lowered the amounts states could collect to a tax rate of 3.5 percent.  For those states whose provider tax rates were below 3.5 percent, Congress froze them where they were.  Iowa’s tax rate on the managed care companies is 0.95 percent, the same as the health insurance premium tax.

So what is being proposed here?  Since Iowa’s tax rate is so low when compared to the other states charging the tax on managed care organizations, the federal government is allowing Iowa to raise the MCO tax until October.  This allows the state to get an additional $124.3 million from Washington for Iowa’s Medicaid program.

Why are the other insurance companies opposed to this?  Because the federal government said that Iowa has to tax all state-regulated health insurance companies, not just the three MCO’s.  A provider tax must apply to all in that field, not just those providing care under the Medicaid program.

How much would these insurance companies have to pay?  The amount is expected to be $27.7 million.

I work for a large employer.  Will my insurance company have to pay a tax for my coverage?  No. States are not allowed to tax these health plans, so their rates will not be affected by this proposal.

Does this affect those Iowans who are on Medicare?  No, it does not.  States are not allowed to tax federally-regulated health plans.  This change will not impact Iowa seniors with Medicare plans.

What happens if this plan does not go into effect?  The state will have to find other ways to provide additional funding to Medicaid or reduce the Medicaid program by lowering what it pays for services or reducing what services are covered.