State Legislature Passes New MCO Tax, Rescues Over $1 Billion for Medi-Cal

The California legislature Monday approved a new health care tax, capping a months-long quest to safeguard over $1 billion in annual Medi-Cal funding the federal government had threatened to take away.
The three-year tax on managed care organizations is expected to bring in nearly $1.4 billion a year to fund Medi-Cal, the state-federal government health program for people with low incomes.
Although the new tax will be imposed on a wider group of health plans than the tax it replaces, it is expected to reduce the overall fiscal liability of insurers by $106 million, according to calculations by legislative analysts.
That’s because the higher amount of tax initially received by the state will draw more federal dollars than under the current system, and those funds will help pay for reimbursements and breaks on other taxes that will significantly reduce the real cost to insurers.
The old tax, which expires June 30, has been imposed only on managed care plans in the Medi-Cal business. The new tax will be levied on all managed care plans. And to offset the cost to insurers, the plan gives them $371 million in breaks on the state premiums and corporation taxes.
The new managed care tax is part of a package that also includes funding for people with developmental disabilities, skilled nursing facilities and retiree health care.
The complicated tax plan, whose full impact many legislators don’t fully understand, managed to garner a two-thirds majority in both houses, which was required because it is technically considered a tax increase.
The expiring tax could not be renewed in its current form, because federal officials said in 2014 that it was out of compliance with their standards and they would no longer provide funds to match the revenue it raised.
The proposal was introduced by Gov. Jerry Brown, so it’s likely he’ll sign it into law. But the deal still requires approval from the feds for the expected Medi-Cal funds to materialize.
The author of the bill, as well as Legislative analysts and legislators who supported it, said the new tax deal is expected to have no net impact on the state’s general fund.
That’s because the breaks on the premiums and corporation tax are offset by the new dollars flowing in.
Opponents of the bill, however, said it was hard to predict its ultimate impact on the state’s general fund and on consumers.
State Sen. John Moorlach (R-Costa Mesa), said the impact on for-profit insurers was uncertain and it is impossible to predict what their premium taxes and taxable income will be over the next two years, according to a blog post by Jon Fleischman, politics editor at Breitbart California, a conservative news and opinion website.
”Consequently, no one knows if the bill is good for consumers, the for-profits or the State of California’s net tax revenues,” Moorlach said, according to the website. “I know it is nice to assume that it will all work out. But, this is a very complex arrangement that deserves a less rushed analysis.”
Sen. Jeff Stone (R-Temecula) agreed there were too many unknowns associated with the bill, and he worried that premiums might rise. The goals of the bill could be accomplished without imposing the new tax, he said.
“If we raise taxes, someone has to pay the bill,” Stone said. “The bottom line is, the consumer will be hurt.”
Speaking on the Senate floor Monday, Sen. Ed Hernandez (D-West Covina), who authored the bill, conceded, “It may be complex, I agree.”
However, “the net effect is simple,” Hernandez said. “This means a stable, ongoing source of funding for Medi-Cal. It will not negatively impact the general fund. And it means a total of $106 million to the health plan community. This is the best example of a win-win I have ever seen.”
Republican Assembly member Brian Maienschein (R-San Diego) had a different take on the tax. Because of the net-positive for insurers, “This is a $100 million tax cut,” he noted. “It’s not often in our political careers we get to do that.”
In addition to the revamped managed care tax and the federal Medi-Cal money it is expected to bring in, the bill passed Monday also includes $300 million for services to help people with developmental disabilities; $240 million for the future health care costs of retirees; and $123 million in restored funding for hospitals with skilled nursing facilities.
Hernandez acknowledged that federal approval for the tax plan still looms large. Asked what would happen if the feds nixed it, he replied, “I don’t have an answer for that. It’s just too depressing to think about.”