Extras on Excise: Checking-Up on California’s New Managed Care Organization Tax


Changes are coming to California’s tax on managed care organizations (MCOs), prompted by the danger of losing out on federal financial aid that supports the state’s Medicaid program, Medi-Cal. This new tax, which is accompanied by changes to the corporate income and gross premiums taxes, protects the over $1 billion in federal aid the state receives each year.

The need for a new tax first arose in 2014, when the Centers for Medicare and Medicaid Services (CMS) issued guidance to the states clarifying the permissible types of taxes that could be imposed on managed care organizations. The need for guidance resulted from an Office of Inspector General report about Pennsylvania’s impermissible gross receipts tax on Medicaid MCOs. 

Most importantly, the guidance clarified that taxes on MCOs structured to impose tax only on a subset of MCOs, instead of imposing tax on all MCOs in a state, are impermissible and cannot be used to generate matching federal financial participation.

After months of negotiations and a special legislative session held to address the issues posed by the existing MCO tax, California enacted a tax package on March 1 that will go into effect on July 1, the start of the next fiscal year.

Beginning July 1, all managed care organizations in California will pay a tax using tiered rates based on the number of plan enrollees. This is very different from the current 3.9375 percent of gross receipts tax imposed only on MCOs that sell Medi-Cal health plans that has been in place since 2013. The new tax will be paid in four installments, and is currently set run for three fiscal years, expiring at the end of the 2018-19 fiscal year if not extended by the legislature. 

Below are the tax rates for the tiered system, which the California Department of Health Care Services will use to determine the total amount of tax due for each health plan during the fiscal year:  

Medi-Cal Taxing Tiers (plans with Medi-Cal enrollees) 

Tier I - 0 to 2,000,000 Medi-Cal enrollees

  • FY 2016-17 - $40 per enrollee
  • FY 2017-18 - $42.50 per enrollee
  • FY 2018-19 - $45 per enrollee 

Tier II - 2,000,001 to 4,000,000 Medi-Cal enrollees

  • FY 2016-17 - $19 per enrollee
  • FY 2017-18 - $20.25 per enrollee
  • FY 2018-19 - $21 per enrollee

Tier III - more than 4,000,000 enrollees

  • FY 2016-17 - $1 per enrollee
  • FY 2017-18 - $1 per enrollee
  • FY 2018-19 - $1 per enrollee

Other Tax Tiers (plans without Medi-Cal or AHCSP enrollees): 

Tier I - 0 to 4,000,000 enrollees

  • FY 2016-17 -  $7.50 per enrollee
  • FY 2017-18 -  $8 per enrollee
  • FY 2018-19 -  $8.50 per enrollee 

Tier II - 4,000,001 to 8,000,000 enrollees

  • FY 2016-17 -  $2.50 per enrollee
  • FY 2017-18 -  $3 per enrollee
  • FY 2018-19 -  $3.50 per enrollee 

Tier III - more than 8,000,000 enrollees

  • FY 2016-17 - $1 per enrollee
  • FY 2017-18 - $1 per enrollee
  • FY 2018-19 - $1 per enrollee

Alternative Health Care Service Plan (AHCSP) Tier

AHCSP Taxing Tier - 0 to 8,000,000 enrollees

  • FY 2016-17 -  $2 per enrollee
  • FY 2017-18 -  $2.25 per enrollee
  • FY 2018-19 -  $2.50 per enrollee 

Two types of health plans are excluded from the new tax: (1) prepaid health plans operating lawfully under Mexican law, and (2) health plans owned and operated by IRC § 501(c)(3) hospitals or health systems, if the plan has a substantial amount of enrollment in and is headquartered in the County of Sacramento or San Diego. 

As a part of the deal to enact the new MCO tax, legislators agreed to make changes to the corporate income and gross premiums taxes as well. 

The corporate income tax changes include the following: 

  • Gross income will not include qualified health service plan income (e.g., premiums, copayments, risk pool revenue, capitation payments, interest) accrued with respect to enrollment or services occurring between July 1, 2016 and June 30, 2019;
  • Qualified health care service plans with no income other than excluded health service plan income is exempt from the minimum franchise tax for that taxable year; and
  • Franchise Tax Board Legal Ruling 2006-01, issued April 28, 2006, regarding apportionment factor treatment of exempt income, will apply to apportionment factors attributable to the income of qualified health care service plans.

For the gross premiums tax, the tax rate will be 0 percent for health insurance premiums received between July 1, 2016 and June 30, 2019, for insurers with a corporate affiliate that is a qualifying health plan subject to the MCO tax. Also, the reduced tax rate won’t be considered for retaliatory tax purposes. 

Even though California enacted this tax package as a solution to potentially losing federal aid, there is one more hurdle to overcome. CMS must still approve the new tax before California starts collecting it. 

 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the tiered tax rate, instead of a flat tax rate, is a good idea? 

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