What is the HIT?

Health Insurance Tax (HIT) Background

The small business community has consistently said that controlling the increasing costs of health insurance premiums is their No.1 concern and should be the focus of health reform legislation, but the Health Insurance Tax (HIT), included in the Patient Protection and Affordable Care Act (PPACA), raises the cost of small business health insurance premiums. This tax will amount to $145 billion in assessments between 2014 and 2024 alone and is levied on health insurance companies. This tax is almost entirely passed on to consumers in the fully insured marketplace, where nearly all small businesses and the self-employed purchase their coverage. This tax on small business owners raises insurance costs for already struggling small businesses and is contrary to the goals of health care reform.

How does the tax work?

Messaged as a "health insurance fee," the HIT is actually a hidden tax on small business. PPACA assesses a tax on all health insurance companies based on their "net premiums" written. The tax raises $7 billion starting in 2014, $18 billion in 2024 and more in later years. The amount of the HIT that the insurance company is responsible for is roughly equal to the percent of the market subject to the tax that the insurance company covers. The larger the insurance company’s market-share, the higher their annual HIT. Insurers and economists have consistently agreed throughout the health care debate that new taxes on insurers inevitably mean new costs passed along to customers. The group that experiences the most cost shifting is the fully insured market.

How does this new tax increase the cost for small business?

A health insurance company is defined to specifically exclude employers that self-insure. Most small-business owners do not self-insure because they do not have a large enough pool of employees. Instead, small employers purchase health insurance in the fully insured market. The only insurance plans that factor into the equation for purposes of determining the insurance company’s portion of the HIT are fully insured plans—the plans that 88 percent of small business owners purchase.

A Congressional Budget Office (CBO) report confirms that the HIT “would be largely passed through to consumers in the form of higher premiums for private coverage.” A study by former CBO Director Douglas Holtz-Eakin indicates that the anticipated impact is as much as three percent-nearly $500 a year per family.

In Your State…
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