March 9, 2024
For many years, California has been using a federal waiver approval to implement a ‘tax’ on (California) Managed Care Organizations. The ‘tax’ is based on the Per Member Per Month (PMPM) Medicaid payments made by the state to MCOs during the previous fiscal year. The funds collected from the MCOs are used to increase Medicaid rates for California Medicaid providers and in this process, the state is able to draw down additional federal match dollars. The state ‘pays back’ the MCOs through a rebate program using some of the proceeds from the additional federal dollars it has leveraged as result of its Federal Medical Assistance Percentage (FMAP) agreement with the federal government.
Background: Medicaid is a joint federal-state program that provides healthcare coverage for low income individuals. Financing the program is a shared responsibility, with states receiving federal matching funds for eligible state expenditures. States like California, New York and Illinois have traditionally received the minimum amount of FMAP assistance – about 50% for most Medicaid services while other states receive far greater matching percentages. But there have been exceptions to this. For instance, when the federal government decided to incentivize states to make care management services available to Medicaid members, NYS received a time limited 90% federal match to establish and operate the NYS Health Home Program. The problem here is that the super high FMAP rate was not permanent. The state has been trying to reduce its overall spend on the Health Home Program ever since.
It appears that the ‘MCO Tax’ in California is used as a mechanism to generate additional state funds that can be used to match with federal funds to bring additional federal Medicaid dollars to California. We are hearing a persistent rumor that the Assembly is considering including a proposal in its one-house budget bill (coming out next week) that will include language requiring NYS to pursue CMS waiver approval for an MCO Tax, or something similar.
It sounds like the Assembly is discussing a 3% across the board Medicaid rate increase with additional funds for hospitals, nursing homes and certain other healthcare provider types. This is not in place of a Human Services COLA.
It’s helpful to remember that it’s an election year and the state has (according to the Division of Budget) a $1.35B deficit to fill. Lawmakers are facing increasing pressure from advocates to raise rates. However, in January the Governor sent the legislature a budget proposal that included unpopular healthcare funding reductions. It is unclear whether the Senate one house budget bill will include a similar proposal, or whether the Senate or the Executive would ultimately support this idea.
From what I have read the ‘MCO Tax’ in California is used to leverage federal funds for its Medi-Cal Program. It leaves the health insurance industry no worse off financially, and provides a net annual state General Fund benefit of roughly $1.5 billion, with these freed-up dollars supporting critical public services and systems. The downside is that nothing lasts forever and states can become dependent on ‘innovative funding solutions’ that are temporary fixes. An example of this is the OMH COPS subsidy that was designed to fix a rate problem decades ago but was deemed to be an illegal intergovernmental transfer. NYS was required to remove the COPS funds from the OMH Outpatient Clinic rates for providers that received it (and not all providers received this subsidy) and rates fell precipitously.
One house budget bills are due to be released next week. Please do not make any financial decisions based on this information. First we need to see it in print in a one-house budget bill and this is no guarantee it will come to pass.
Additional Information:
-Kaiser Family Foundation on States with an MCO Provider Taxhttps://www.kff.org/other/state-indicator/states-with-an-mco-provider-tax-in-place/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D
-California Hospital Association on MCO Tax Ballot Initiativehttps://calhospital.org/wp-content/uploads/2023/09/MCO-Tax-Ballot-Initiative-FAQ_Final.pdf