State Regulators Keep a Watchful Eye on Healthcare Companies’ Federal Tax Cut “Windfalls”

In December, President Trump signed the Republican tax reform bill into law, which among other things, eliminates the health insurance mandate penalty and reduces the corporate tax rate from 35 to 21 percent. The bill provides for $1.5 trillion in tax cuts over the next decade, mostly benefiting high-income earners and corporations, which Republicans hope will stimulate economic growth. Now, a few months into effect, health care companies are taking stock of how the tax law benefits their bottom line and how to best invest the savings for future success.

How much of a tax break did some companies get? For 2018, Molina reported that tax reform created a $59 million benefit, while Centene received an income tax benefit of $55 million. Centene plans to invest at least part of the gain in employee initiatives, such as training and leadership development programs, in addition to technology and process improvements. Other companies experienced even larger gains, with Humana reporting a $550 million benefit and UnitedHealth Group estimating that reform will improve earnings and cash flow by $1.7 billion. Humana intends to return half of the savings to shareholders, while investing the other half in its employees and business through initiatives like moving performance-based employee compensation up a year and raising its minimum wage to $15 an hour. Other healthcare companies are rolling out a series of benefits, like CVS Health, which plans to use its $1.5 billion tax break to: increase its minimum wage from $9 to $11 an hour; hold premiums steady for employees on the company health plan for 2018-2019; and offer one month of paid parental leave for full-time employees, beginning this spring.

However, some state regulators seem skeptical of how companies will invest the tax benefit and are looking to take a more active role in ensuring that consumers benefit as well. In New York, Governor Andrew Cuomo (D) recently unveiled his fiscal year 2019 Executive Budget, which proposes to institute a 14 percent surcharge on the net profits of private health insurers operating in the state. The state is expected to lose $14 billion in annual revenue under the federal tax law, and the Governor views the surcharge as an opportunity to recapture some of insurers’ “windfall benefit.” In opposition to the surcharge proposal, Republicans in the State Senate quickly approved legislation that would require for-profit health insurers to return federal tax cuts directly to consumers and taxpayers, rather than being used to “balance the state budget.” The bill, S.7587, which is currently in committee, would require the superintendent to take the “prospective impact of a reduction in income tax” into account when approving or modifying rate filings, while still ensuring that rates are actuarially sound.

Similarly, in California, Insurance Commission Dave Jones directed his department to begin a regulatory review of insurers’ rates, given the “major tax windfall” from federal reform and the fact that California’s premium rating standards limit insurer profits. Jones also asked the department to identify possible areas in other lines of business where insurers might benefit from the tax reductions. The goal of the review is to identify the department’s legal authority and any necessary amendments that could be made to rate formulas that would allow the tax cuts to pass onto policyholders. Jones received support from the Consumer Federation of America, which sent a letter to insurance regulators outlining how tax cuts improve insurers’ profitability and urging them to require companies to lower their rates for consumers as a result.

Take Away: Health care companies will benefit greatly from federal tax reform and have proposed a wide range of ideas for re-investing the savings. While many insurers profess that their tax beak will be used in innovative ways, consumers and regulators in some states are keeping a close eye on how profits are spent. Already, progressive states, like New York and California, are exploring ways to pass tax cuts directly onto consumers, and soon, other states might consider how recent tax cuts should factor into 2019 health insurance rate approvals.

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