MCO Tax on the Brain

October 8, 2024

The Empire Center for Public Policy is (in my opinion) part fairly conservative think tank, part government watchdog. The Center’s Bill Hammond has taken aim at the controversial MCO Tax that was proposed earlier this year. Ultimately the 24-25 enacted state budget included rather vague language requiring New York State to apply to CMS for approval of the Tax that would generate some $4B in Medicaid funds the state needs to keep commitments made to hospitals and nursing homes for funds they fought for during budget negotiations.

The MCO Tax was the subject of several NYS Council briefings for our members – one that we sent to all members (below) was sent well in advance of the official news the state was contemplating applying for use of the Tax that several other states have been using for years.

A top priority for the NYS Council in the coming budget negotiations is to ensure state leaders set aside proceeds from the Tax for mental health and substance use disorder providers and our systems of care in the revenue that may come from the Tax, should it be approved.

We are hearing that NYS submitted an application to create an MCO Tax here in mid-September but the application was barebones – methodology for calculations, etc. and that it did not speak to how the proceeds from the Tax would be distributed.

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Hochul Hides the Specifics of a Looming Tax on Health Insurance
by Bill HammondThe Hochul administration has quietly requested federal approval for a multibillion-dollar “MCO tax” on health plans without announcing the move or providing details to the public.

As vaguely authorized by lawmakers this spring, the tax on managed care organizations, or MCOs, is expected to primarily target Medicaid in a gambit to extract federal matching aid. However, commercial health plans and their customers will have to contribute at least some portion, and that amount remains unclear.

Late last month, the Health Department submitted a plan for the tax to the Centers for Medicare & Medicaid Services, or CMS. The plan spells out which MCOs would be targeted, what rates they would pay and how much money the tax would raise – specifics that the Legislature left to be determined by Health Commissioner James McDonald in negotiation with Washington officials.

Also uncertain is when the tax will take effect. Under federal rules, it could be applied retroactively as early as July 1.Read the Full Article on EmpireCenter.org

Good morning,In 2016 California received federal waiver approval that allowed it to implement a tax on Managed Care Organizations (MCOs) based on the Per Member Per Month payments made (by the state to the MCOs) during the previous fiscal year. The funds are used to increase Medicaid rates to California Medicaid providers. From what I can see, the MCO tax is used as a mechanism to generate new state funds that can be used to match with federal funds to bring additional federal Medicaid dollars to California in order for the state to advance healthcare reforms that the federal government wants to incentivize.

In summary, the California MCO Tax imposes a tax on MCOs, the state collects the funds and spends them on Medicaid rate increases and in doing so draws down federal match assistance (FMAP) on the Medicaid dollars. The state pays back the MCOs through a rebate program.

We are hearing a persistent rumor that the Assembly is considering including a proposal in their one-house budget bill (coming out next week) that will include language requiring NYS to pursue a CMS waiver for an MCO Tax or something similar.

Importantly, states around the country get varying federal matching assistance percentages (FMAP) to support state Medicaid services. California and New York have traditionally received the minimum amount of FMAP assistance – about 50% for most Medicaid services while other states receive far greater matching rates. There have been times when the 50% match has been much greater. When the federal government decided to incentivize care management services, NYS received a 90% federal match during the early years of the Health Home Program. The problem here is that the very high FMAP rate that incentivized NYS to implement Health Homes didn’t last forever and we now see proposed and/or enacted Health Home funding reductions from year to year.

It sounds like lawmakers are envisioning a 3% across the board Medicaid rate increase with additional funds for hospitals, nursing homes and other healthcare provider types. In this scenario, the Assembly and Senate would be pushing for rate increases rather than having to accept executive budget (proposed) cuts. This is important since all 212 Assembly and Senate seats are up for re-election in November.

From what I have read the current MCO Tax Waiver in California leverages federal funds for its Medi-Cal Program, 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. Please do not make any financial decisions based on this information which is just speculation. We need to see it in print in the one-house budget bills. It would also need to be enacted as part of the new state budget, approved by CMS, and implemented.
Lauri
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New York Has a Budget Trick to Try on the Federal Government

The state hopes to take advantage of Medicaid reimbursement rules to divert federal funds into state coffers.Listen to this article · 5:59 min Learn more

Gov. Kathy Hochul said she was negotiating with federal officials to allow New York to use a loophole exploited by California that enabled the state to receive billions of dollars.Credit…Cindy Schultz for The New York Times

By Grace Ashford

Reporting from the State Capitol in Albany, N.Y.April 5, 2024

Facing increased Medicaid enrollment and a cash crunch across New York’s health care system, Democrats in Albany hope to employ a maneuver that they say will allow the state to generate billions of dollars a year essentially out of thin air.

The proposal takes advantage of a loophole in the Medicaid reimbursement process that allows states to bill the federal government for billions of dollars.

Here’s how it could work: New York could create a tax aimed at managed care organizations like Aetna and UnitedHealthcare that would force them to pay a hypothetical $1 billion into state coffers. The state would then repay the insurers through Medicaid, using $500 million in state funds and $500 million more in matching federal funds — leaving the state an extra $500 million for its budget.

Because whatever the state spends on Medicaid is reimbursed by the federal government, the loophole creates the potential for a legal shell game where the Medicaid insurers come out even, the state makes money and the federal government loses it.

Variations of this trick have been around for years, with 18 states using some type of tax on managed care organizations to increase their share of federal reimbursements. But last year, as California faced vast budget gaps, state leaders advanced an aggressive version of the scheme that narrowly drew from and benefited Medicaid insurers, resulting in a head-spinningly circular transaction worth billions of dollars.

Now Democrats in New York are eyeing California’s maneuver, seeing the move as an easy way to inject billions of dollars into the state’s health care spending as it negotiates the overall state budget.

New York spends more per capita on health care than any other state in the country, according to the Centers for Medicare & Medicaid Services, an amount that is projected only to grow thanks to rising enrollment and demographic shifts.

Gov. Kathy Hochul has proposed cutting $1.2 billion out of the state’s health care budget, largely out of long-term care and related programs in her executive budget, a plan that would nonetheless increase health care spending by roughly $3 billion.

Democrats in the Legislature have railed against these cuts, which are also fiercely opposed by the powerful Greater New York Hospital Association and its allies in labor who have collectively spent hundreds of thousands of dollars on recent lobbying and public awareness campaigns.

Hospitals are asking for an increase in Medicaid reimbursement rates that they say will help to shore up a crisis in safety-net hospitals, and ensure that Medicaid patients receive better care.

It is not clear how exactly New York intends to use any funds derived from the Medicaid plan. Assembly Speaker Carl E. Heastie, a Democrat, said the funds would be used for “medical purposes” and suggested that some of the money might be held back to offset future financial risk.

Amy Paulin, the chair of the Assembly Health Committee, said she supported the plan because it had the potential to help address systemic disinvestment that had left many safety-net facilities on the brink of collapse. “We are in a terrible situation now, and a large part of that is due to the fact that Medicaid underfunds every single procedure,” she said.

She added, “The question to me is why we would leave federal dollars on the table?”

There is no guarantee that the federal government will approve New York’s arrangement, and some skeptics caution that balancing the budget on that assumption could exacerbate financial woes.

Although the Centers for Medicare & Medicaid Services approved California’s tax through 2026, it warned that it regarded the maneuver as a violation the spirit of the program, and said in a letter accompanying the approval that the agency intended to propose a regulation “to address this issue. The Centers for Medicaid & Medicare Services declined a request to comment on New York’s proposal.

But Ms. Hochul said on Thursday that she believed the federal government was genuine in its interest to close the loophole California had found, and that she hoped she could persuade federal officials to hold off until New York could also take advantage.

“We’ve been very, very persistent in asking them to give us the same accommodation before anything closes,” Ms. Hochul said, adding that the effort included communications with the “highest levels of the White House.”

It was not a yes yet, the governor said, “but they’ve heard us.”

Even so, the specter of the loophole soon closing only heightened the concerns of some fiscal watchdogs.

“The best they can hope for is a short-term windfall,” said Bill Hammond, a researcher with the Empire Center who has deeply investigated the state’s health care spending. “But they’re talking about using it to make changes to the Medicaid rate structure. That would be ongoing.”

Andrew Rein of the nonpartisan Citizens Budget Commission agreed, saying: “You should not use short-term money for long-term needs. That is a prescription for fiscal instability or worse.”

But lawmakers in California shared in Ms. Hochul’s optimism, saying they are not at all clear that the money will soon run out.

“That rumor has been there for a while, and C.M.S. has never pulled out,” said Senator Caroline Menjivar, a Democrat who leads California’s health and human services budget subcommittee. She added that California expects to receive an additional $1.5 billion more than the state requested the past year.

“That doesn’t tell me that C.M.S. is pulling the rug from underneath us,” she said.

The biggest concern, Ms. Menjivar said, was how the political environment in Washington would change under a potential second Trump presidency.

“Whatever happens in November could alter a lot,” she said. “The federal administration, if it changes, is not going to look to California as a friend.”

The same could certainly be said for New York.

Grace Ashford covers New York government and politics for The Times. More about Grace Ashford