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MCO Tax a Looming Question in Governor’s Upcoming Budget Proposal

When Gov. Jerry Brown (D) unveils his fiscal year 2016-2017 budget proposal on Thursday, one of the big unknowns may be answered — what he plans to do about the pending loss of the MCO tax and the $1.1 billion hole it leaves in the budget.

The managed care organization tax is due to expire June 30, 2016. The state imposed a 3.9% tax on revenue generated by health plans through Medi-Cal managed care and received federal matching funds for the MCO tax. The state then reimbursed the MCOs.

That deal worked for the state and worked for the MCOs. But in July last year, federal officials made it clear it didn’t work for them and said they would no longer condone the practice.

Brown convened a special legislative session on health with the primary goal of having lawmakers figure out a way to replace that $1.1 billion, in part with a revised version of the MCO tax.

But health plans and Republican legislators balked at the new tax idea, and no solution was found. The special session on health is technically still in session; it has never been adjourned, so legislators could take up the discussion again.

The big question for Thursday is: Will the governor consider the MCO tax gone and cut $1.1 billion in programs in Thursday’s budget proposal, or will he count on lawmakers to pass the revised MCO tax he floated last year?

Or, as a brief issued Tuesday by the California Budget and Policy Center put it, will the governor use the carrot or the stick?

“The Governor could try a ‘carrot’ approach once again, calling on legislators to pass a revised MCO tax and pledging, in return, to support certain funding and policy changes for which lawmakers have been pressing. By assuming the MCO tax would be extended, the Governor would eliminate the $1 billion-plus funding gap, at least on paper,” the CBPC brief said.

“There’s also the ‘stick’ approach,” it said, “closing the shortfall with more than $1 billion in spending cuts aimed at putting maximum pressure on lawmakers in order to reach the two-thirds supermajorities needed to pass a new MCO tax.”

Anthony Wright, executive director of Health Access California, said it was disappointing to see the revised MCO tax fail last year.

“But we have hope in the new year,” Wright said. “As much as we need to renew the MCO tax, we shouldn’t use the state’s most vulnerable as leverage in these negotiations.”

Related Topics

Capitol Desk Health Care Costs Medi-Cal