LAO Report: State Could Lose $1 Billion

California stands to lose about $1 billion in federal health care funding through potential elimination of the current managed care organization tax if the governor’s proposed revision of the tax is not approved by federal officials, according to a report issued last week by the state Legislative Analyst’s Office.

The Feb. 12 LAO report gives an overview of the $21 billion health care budget proposed by Gov. Jerry Brown (D) and points out that the state will absorb a significant hit when it has to discontinue the current MCO tax. Brown has proposed a restructuring of the tax to replace that funding and comply with new federal guidance.

July 25 letter from CMS officials said California’s existing MCO tax is inconsistent with federal Medicaid regulations — “thereby putting over $1 billion in federal funding to the state at risk in future years if the tax were extended in its current form,” the LAO report said.

Brown’s proposed revision of the MCO tax would maintain the funding from that tax and include enough money to restore service hours in the In–Home Supportive Services program.

According to the LAO, that revision should meet federal standards — but it raised concerns about the precedent the revised tax would set.

“We find the governor’s proposed MCO tax would likely meet federal requirements, but note that in doing so, the proposal would in part resemble an actual tax on commercial health coverage (in addition to being a typical Medi–Cal financing scheme to leverage federal funding), with broader economic and social implications,” the LAO report said.

“While we recommend the Legislature adopt core features of the governor’s proposal by August 2015, we find that permanent authorization of the proposal in its current form is not warranted,” it said.

Other health care funding issues were raised in the report:

  • CHIP funding: The Children’s Health Insurance Program is a federal matching-funds program to ensure health coverage among California children whose families’ incomes are slightly above Medi-Cal eligibility standards. That federal money is uncertain, according to the LAO report, “as the federal government weighs the potential for transitioning children currently covered by CHIP into other sources of health coverage, such as subsidized coverage through Covered California. We recommend the Legislature begin weighing various options for children’s coverage should CHIP be discontinued.”
  • State hospitals: Analysts said expanding capacity at state hospitals might be unnecessary, and recommended that the Legislature reject the capacity expansion until the state Department of State Hospitals provides “additional information … justifying the need for it in light of these concerns.”
  • Licensing workload backlog: The Legislature should delay approval, the LAO report said, of the governor’s plan to increase staffing and improve quality at the state Department of Public Health Licensing and Certification. The analysts said the Legislature should wait until it gets a more-detailed and overdue report from the administration on the problems at L&C.

The 3.9% MCO tax on the gross receipts of Medi–Cal managed care organizations is used to draw down matching federal funding, then reimburse MCOs through Medi-Cal payments for services. The governor’s budget proposal assumes $803 million from the tax in 2014–15 and $1.1 billion in 2015–16. That tax is due to expire on July 1, 2016.

The governor’s proposed changes, however, are “unlike other health care-related taxes imposed by the state,” the LAO report said.

The current MCO tax is based on a percentage of MCO gross revenue from Medi–Cal — but the proposed tax is a unit tax based on the quarterly member months of MCOs’ enrollment.

“The current MCO tax is economically neutral to all 27 MCOs paying the tax,” the report said. “That is, there are no net winners or losers among these current taxpayers. The governor’s proposal to restructure the tax results in no winners — and some clear losers — among the 39 MCOs that would be affected by the proposal.”

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