Deal On New Managed Care Tax Imminent

Two major players in the health insurance industry have endorsed a proposed new tax on managed care plans after seven months of challenging negotiations aimed at preventing huge state budget cuts.

The revamped tax, included in a bill that was filed Monday in both houses of the state legislature, is needed to avoid a $1.1 billion hole in the state’s health care budget come June. It replaces a similar levy that will expire June 30 after being rejected by the federal government.

Local Health Plans of California, which represents 16 publicly financed, nonprofit health plans covering 8 million people, and Oakland-based Kaiser Permanente, the nation’s largest managed care organization, both said Tuesday that they thought the proposal was fair. (Kaiser Health News, which produces California Healthline, is not affiliated with Kaiser Permanente.)

Failure to replace the current tax could jeopardize funding for Medi-Cal programs that provide services to developmentally delayed children, the elderly and the disabled.

The expiring tax is a 3.9 percent levy imposed only on managed care plans that serve Medi-Cal patients. Last July, federal officials told California and other states with similar levies that this approach did not meet federal standards.

They must tax all managed care plans — not just the ones serving Medicaid patients, the officials said.

The matter concerns the federal government because it matches what California spends on Medi-Cal, the state’s version of the federal Medicaid program for people with low incomes.

That means the revenue raised from the tax on Medi-Cal managed care plans draws an equal amount in funding from the federal government. And the feds warned they would cut off those matching funds if the tax was not revised.

After the state collects the tax from the health plans, it effectively reimburses them through Medi-Cal payments for administrative costs and patient services.

The federal government has long wanted to end this practice.

Since the feds announced they would no longer match funding for the managed care tax as currently constituted, state officials have been scrambling to devise a new version that would not only please Washington, D.C. but also be acceptable to the newly taxed insurers, who are not thrilled at the prospect of shelling out so much money.

The new proposal, which requires a two-thirds majority in both houses to pass, would raise the same $1.1 billion that is at risk if the current tax simply disappears. And it would help ensure that various Medi-Cal managed care programs remain funded at constant levels.

Medi-Cal managed care plans still would recover the taxes they pay, as in the current system. And the proposal offsets the financial hit to the other plans through a series of tax breaks, including a three-year suspension of the 2.35 percent gross premiums tax paid by commercial insurers.

“I’m as optimistic as I’ve ever been that we have a deal,” said Brianna Lierman, CEO of Local Health Plans of California. “There definitely have been moments in this long process where I’ve wondered if it can happen. But this is a deal that we think is fair to everyone.”

Kaiser Permanente echoed those sentiments.

“From what we’ve seen, we believe this proposal is a balanced one that will not negatively impact our purchasers or members,” said Kaiser spokeswoman, Amy Thoma.

The biggest dog in the negotiations, the California Association of Health Plans, has yet to bark. But the insurance trade group should be able to make an official statement Wednesday about the tax proposal, according to Charles Bacchi, president and CEO.

“Now that the new bill is in print, it gives us some certainty of the proposal. It gives us a chance to review it and decide our position,” Bacchi said.

Since learning that the current tax was going away, state health officials have been walking a financial tightrope in their efforts to create a funding equation that fairly distributes the burden and benefits among all managed care organizations.

“They’ve managed to structure a tax that passed the federal test and did that in a way that minimized the hit as much as possible to commercial licenses,” Lierman said. “We think it’s a small price to pay to ensure continued funding for the Medi-Cal program.”

Because the plan was just unveiled on Monday, no analysis has been released showing its net financial impact on health plans or how the tax breaks will affect the state’s coffers.

Today the California State Assembly and Senate are expected to convene a special joint session on health care to discuss and possibly vote on the new plan.

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Capitol Desk Medi-Cal