California legislators approve managed care organization tax

March 02, 2016
Area(s) of Interest: Commercial Payors Payor Issues and Reimbursement 

The California legislature approved a managed care tax package Monday designed to preserve more than two billion dollars in federal and state funds for Medi-Cal. Two Senate Republicans, Anthony Canella (Ceres) and Bob Huff (Diamond Bar), joined all 26 Senate Democrats voting in favor of the bill (SBx2 2). In the Assembly, 11 Republicans joined all Assembly Democrats present to vote in favor.

The current managed care organization (MCO) tax would have expired this summer if legislators could not agree on a replacement. Since 2005, the state has taxed MCOs and used the money to cover the costs of the Medi-Cal program. However, federal officials in 2014 informed California that its MCO tax structure was not compliant with federal requirements. Since then, the California Department of Health Care Services and other administration officials have been negotiating with the health plans to construct a tax scheme that meets federal standards. The loss of the MCO tax and the federal matching funds would have meant a devastating loss of over $2 billion for the Medi-Cal program.

The package of bills 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 included 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.

The disability funding has been hailed as a lifeline to people with disabilities and their caregivers. It has also become a political touchstone this year as lawmakers from both parties argued it was one of only a few programs that have not seen funding increases following deep cuts made during the recession.

The new MCO plan rests on a tax swap. Health plans hit by the MCO tax would 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.

Overall, the state general fund would net an estimated $1.3 billion in 2016-17, an amount that would rise slightly during each of the three years covered by the bill.

The Obama administration will have a final say on whether the state’s approach meets federal requirements and whether it is eligible for federal matching money.

Remaining issues in the special session include California Medical Association-supported tobacco use prevention bills. Legislative leaders had indicated their desire to adjourn the special session shortly after the MCO tax deal was finalized, in part to allow the End of Life Options Act to take effect. Although the legislature had passed, and the Governor had signed, the end-of-life legislation last year, because it was passed in the special session, it will not take effect until 90 days after the session has ended.


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