California Legislature poised to pass replacement tax on health care plans

SACRAMENTO — After months of uncertainty, the Legislature appears poised to approve a tax on health care plans that would generate $1.27 billion annually and could substantially boost funding for developmentally disabled Californians for the first time in more than a decade.

If lawmakers approve the tax in a series of votes scheduled for this week, it would replace an existing tax on health care plans that brings in about $270 million less and is set to expire in July because it doesn’t comply with new Obama administration rules dictating how states may levy those types of taxes.
Momentum has been building since Gov. Jerry Brown unveiled the tax proposal early last month, and in recent days it won crucial endorsements from several leading insurers and health plans. Even tax-averse Republican lawmakers had some nice things to say about the proposal during committee meetings last week.
But not everyone is happy. One leading consumer advocate has criticized it as a “valentine” for insurance companies, and the Senate’s highest-ranking Republican is urging her colleagues to reject what she’s calling a tax hike because it will be passed on to consumers through higher premiums.

“Many Californians are struggling to pay their bills, and we should be working toward solutions to make California more affordable, not an even more expensive state to live and work,” said Senate Republican leader Jean Fuller, R-Bakersfield. “We can invest in California’s priorities without increasing taxes.”

The state’s existing tax on managed health care plans dedicates the $1 billion it raises to Medi-Cal, the state health insurance program for low-income Californians that now covers about a third of the state’s residents after being expanded under the Affordable Care Act.
The new tax would use $250 million of the revenue raised to restore funding for the In-Home Supportive Services program that was cut several years ago during the state’s budget crisis. Democratic legislative leaders and some GOP lawmakers are fighting to ensure that another portion of the money goes to the California Department of Developmental Services.
Advocates for the 300,000 developmentally disabled people who receive support through a vast network of state-funded providers said the system, which offers day programs and job training, is so underfunded that it could collapse.
“We lost 45 of our 175 staff members last year because we can’t offer them competitive wages,” said Tom Heinz, executive director of a service provider called East Bay Innovations. “I can’t even tell you how badly a funding increase is needed. I don’t have the words to describe the extent of the need.”
To reach Brown’s desk, the legislation must get a two-thirds vote in the Senate and Assembly. And since Democrats lost their supermajorities a couple of years ago, GOP support is vital. It’s not yet clear which Republican lawmakers will vote yes, but three Capitol sources said “a bloc” of Assembly Republicans is expected to support the bill.
“I’m confident votes will be there for this proposal,” said Sen. Ed Hernandez, D-West Covina, who authored the tax bill with Assemblyman Rob Bonta, D-Oakland. “I trust that my colleagues on the other side of the aisle will put dogma aside and do what’s best for our health care system.”
Assembly Republican leader Chad Mayes, R-Yucca Valley, said members of his caucus are carefully considering the proposal.
“In the past, Republicans supported (similar) financing plans, but only when they did not increase health insurance premiums paid by Californians,” he said.
Brown’s ability to present a tax plan that has won the support of health insurers should also help bring some Republicans along, said Anthony Wright, executive director of Health Access California.
“If we don’t get this done, there will be billions of lost revenue,” he added, referring to the $1 billion in federal funds annually that would evaporate if the Legislature fails to act by June 30.
Currently, the state taxes 26 plans that accept Medi-Cal patients and uses all the money it collects to help finance the program.
The new tax would hit nine additional plans that don’t accept Medi-Cal patients while waiving their responsibility to pay $371 million in other state taxes, including one on health insurance premiums.
That aspect of the deal has drawn the ire of some consumer advocates.
Historically, Blue Shield, Anthem Blue Cross, Health Net and Kaiser Permanente have paid next to no taxes on their premiums because they’re designated as “health plans,” not insurers. But they’re being sued by a Southern California taxpayer who claims they should have been considered insurers — and paying those taxes — all along.
If the plaintiff prevails after the tax legislation takes effect, the four health plans could be excused from paying at least $1 billion annually in taxes on their premiums for at least three years despite a court ruling against them. And that has left Consumer Watchdog President Jamie Court fuming.
“It’s like a judge ruling that Al Capone should go to jail for tax evasion, but the Legislature saying, ‘Well, we’re going to pardon him and let him go to the spa instead,'” Court said.
Sen. Mark Leno, D-San Francisco, acknowledged Court’s concerns but said it would be “foolish” for the Legislature to bank on the outcome of a court case that may not be decided for years when it can act right now to pass Brown’s tax plan and restore hundreds of millions of dollars in cuts to developmentally disabled people and in-home care.
“These new dollars could be a new and dedicated revenue source independent of the general fund,” Leno said. “It’s a rare opportunity. We’d be fools not to grab it.”