One especially peculiar side effect of Obamacare will cause the federal government to begin taxing itself and state governments. This begins in 2014 as the result of the new annual fee imposed on the health insurance industry.

The health insurer fee was created to fund new spending under Obamacare. The new tax hits not only private insurance but state Medicaid managed care programs that are contracted to insurers as well.

Many states contract with private insurers to provide care to their Medicaid beneficiaries. States pay these managed care organizations a fixed premium per member per month. The new tax will increase these premiums, because they will now have to include an allowance to offset the Obamacare fee and to cover the federal income tax impact on the additional revenue added to the premiums to cover the fee.

A recent Milliman study estimates that the Obamacare health insurer fee “will increase Medicaid managed care premiums between 1.5% and 1.6% on a nationwide basis, with some states expected to see increased premiums of up to 2.5%.” Milliman projects that the fee will collect $8 billion the first year and eventually grow to $14.3 billion in 2018, indexed to the rate of premium growth thereafter. All of the tax revenue will accrue to the federal government.

As states prepare their already strained budgets for Obamacare’s massive Medicaid expansion, this tax is going to hurt. Milliman projects that “state and federal government funding for the increase in Medicaid managed care premiums related to the…health insurer fee will be between $36.5 billion and $41.9 billion over ten years, with between $13.0 billion and $14.9 billion of the total funding paid by state governments.”

As Matt Salo, executive director of the National Association of Medicaid Directors said, “This policy never really made sense.… I get the point of an insurance tax, but when you are just passing on those costs to Medicaid, that makes no sense.”

This ridiculous new tax is just another example of Obamacare’s flawed policies and their resulting confusion and higher costs.

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