Iowa Just Raised Taxes on Health Insurers to Rescue Its Medicaid Program — and Nursing Homes Are Watching

Des Moines, Iowa — Iowa’s governor signed a bill into law last week that temporarily raises taxes on health insurance companies to help close a growing hole in the state’s Medicaid budget — a gap that, left unaddressed, would have threatened care services for some of the state’s most vulnerable residents, including nursing home patients.

Gov. Kim Reynolds signed House File 2739 on Thursday, hiking the tax rate on health maintenance organization premiums from 0.925% to 3.5%. The increase applies retroactively to Jan. 1 and runs through Sept. 30, 2026, before dropping to 0.95%. The state faced a hard deadline: Reynolds had until March 31 to act in order to meet federal requirements and unlock additional matching funds through the higher rate.

A Shortfall That Couldn’t Wait

Iowa’s Medicaid program is facing a $90.6 million deficit in the current fiscal year, with an estimated $168 million gap projected for next year. Medicaid covers health care for low-income Iowans and people with disabilities — including tens of thousands of residents in long-term care facilities across the state.

“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 at a news conference Wednesday.

The new law also transfers $89 million to the Iowa Department of Health and Human Services specifically for Medicaid, and shifts $347 million from the state’s Taxpayer Relief Fund to the general fund — moves designed to offset revenue losses tied to tax cuts under the federal One Big Beautiful Bill Act, which Iowa automatically adopted.

The Trade-Off: Higher Premiums Ahead?

Critics aren’t convinced the math works out well for everyday Iowans. Democratic lawmakers and insurance industry lobbyists warned the tax hike will be passed directly to consumers through higher health insurance premiums. Scott Sundstrom, a lobbyist for Wellmark, told lawmakers the increase would amount to a $500 annual cost hike for a family of four with HMO coverage.

“Anyone who has even a basic understanding of how insurance markets function knows exactly what’s going to happen next,” said Sen. Molly Donahue, D-Marion. “Those costs are not going to be absorbed by the insurance companies.”

Reynolds pushed back, arguing insurers had not reduced premiums when the state cut the same tax in 2024. Republican supporters of the bill countered that premium taxes are a corporate cost — not a direct pass-through to policyholders.

The bill passed narrowly, with more than a dozen Republicans joining Democrats in opposition. It cleared the House 53-40 and the Senate 26-19.

What This Means for Long-Term Care

Iowa’s situation isn’t unique. Medicaid underfunding has become a nationwide pressure point for nursing homes, with up to 10 million people at risk of losing Medicaid coverage by 2028 under federal policy changes — a threat that long-term care facilities are tracking closely.

For now, Iowa’s providers got the fix they needed. But the solution came with a clock attached: the higher tax rate expires in October, and the state will need to find other ways to manage its Medicaid budget as the OBBBA’s spending cuts continue to ripple through state finances.