The Centers for Medicare and Medicaid Services (CMS) on Tuesday approved California's new managed care organization (MCO) tax, designed to preserve more than $2 billion dollars in federal and state funds for Medi-Cal.

Since 2005, the state has taxed MCOs and used the money to cover the costs of the Medi-Cal program. However, in 2014, federal officials informed California that its MCO tax structure was not compliant with federal requirements. The California Department of Health Care Services and other administration officials worked with the health plans and other stakeholders to construct a tax scheme that meets federal standards. The loss of the MCO tax and the federal matching funds would have likely meant funding cuts to the Medi-Cal program, including the possible reduction of provider reimbursement rates.

The revised MCO tax was passed by the state legislature in March of this year, and includes a number of tax offsets designed to eliminate the need to raise health care premiums on consumers. To gain Republican support, the package included several components GOP lawmakers wanted, such as providing more money to help people with autism and other developmental disabilities and forgiving a budget debt owed by skilled nursing facilities. Specifically, the deal includes more than $300 million for services for people with developmental disabilities, much of it to increase payments to care providers, who will get a 7.5 percent increase in wages.

Health plans hit by the MCO tax will receive comparable offsets in their gross premium and corporation taxes. This will cost the state an estimated $370 million in the coming fiscal year, with the industry as a whole coming out an estimated $100 million ahead from the offsets. It is not known precisely how each plan will fare under the new tax measure. The tax provisions will go into effect on July 1 of this year and will last for three years, allowing policymakers to consider changes to the tax in the future.