Michigan will start charging a 1 percent tax on health insurance claims paid in the state starting next year, under legislation signed Sept. 20 by Gov. Rick Snyder.
The tax will generate an estimated $400 million annually, which will enable the state to qualify for $780 million in federal funding for Medicaid, the federal insurance program for low-income residents.
Insurers will factor the cost of the tax into health insurance rates.
The legislation also brings Michigan in line with federal rules by eliminating a current 6 percent use tax on Medicaid HMOs. Federal officials have said they will not allow states to charge a use tax on Medicaid plans to receive federal matching funds for the program.
The legislation was part of a deal with lawmakers to balance the state's budget.
"I'm proud we were able to preserve Medicaid funding at a time when the state is facing significant budget challenges," Snyder, a Republican, said in a prepared statement. "The fact that we did not cut Medicaid funding shows that Michigan is committed to protecting our most vulnerable residents."
Out-of-pocket expenses for health care, such as deductibles and co-pays, will not be taxed.
Both the Michigan Association of Health Plans and Michigan Health & Hospital Association supported the new tax to maintain federal funding for Medicaid.