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Many Faces of the MCO Tax

It’s a rare tax that gets health insurers, state officials and consumer advocates to all sing Kuumbaya.

But that was the magic of the managed care organization tax. It taxed Medi-Cal managed care insurers, matched that money with federal dollars, then paid back all of those insurers for services provided. The tax generated $1.1 billion for the state, insurers were held harmless, it helped keep Medi-Cal programs like the Coordinated Care Initiative afloat. Everyone loved it.

Well, everyone except the feds.

In July 2015, federal officials made it clear they would no longer follow that arrangement to match funding. If California wanted federal matching funds, the tax would have to touch all insurers, not just the ones participating in Medi-Cal managed care.

Commercial insurers in California don’t want to be taxed to support Medi-Cal. Those insurers already feel they subsidize the low reimbursement rates of Medi-Cal. They didn’t want to also pony up through a new tax, one that would benefit certain insurers over others.

The remedy, it appears, is to reduce taxes for insurers elsewhere. It’s an idea that was floated at the end of last year’s legislative session, but that effort stalled before it really started. Now the state has gone all-in on the idea.

“We ended the session with an ominous close,” said Charles Bacchi, executive director of the California Association of Health Plans. “But everyone did a lot of work over the holiday season, and we appreciate the way everyone has been working with us on this.”

The linchpin of the proposal to revise the MCO tax was a reduction in the gross premiums tax, down to 3%. The newest proposal takes a step beyond that, Bacchi said.

“The latest proposal is down to 0% for three years,” Bacchi said. “That’s a big difference.”

No decision has been made and insurers are evaluating the state’s offer now, he said.  

“All of the proposals taxed commercial health insurance for the first time. That’s always been the real difficulty,” he said.

Adding one tax while limiting another can make for a complicated formula when individual health plans need to evaluate how hard they may or may not be hit by the new, revised MCO tax, he said.

“We’re still adjusting to changes in the formula,” Bacchi said. “There are a lot of questions about how the offsets would work. … Anytime you have this complicated a package, you have to make sure it is what you think it is.”

Health insurers have a big stake in ensuring Medi-Cal remains strong and viable, Bacchi said.

“The challenge put before us was to find a way to protect the Medi-Cal program,” Bacchi said. “We want to make sure [the new MCO tax revision] works, and we just need to answer some unresolved questions about how it will work.”

Related Topics

Capitol Desk Insurance Medi-Cal