States’ use of health care-related taxes has been on the rise in recent years, as states look to satisfy the rising costs of Medicaid programs and capitalize on matching federal funds. But Pennsylvania’s tax on Medicaid managed care organizations (MCOs) may serve as an example of what not to do for states with similar tax structures.
In a May 2014 report, the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services found that Pennsylvania's gross receipts tax on Medicaid MCOs is impermissible to use for Medicaid financing. The report prompted the Centers for Medicare and Medicaid Services (CMS) to issue a letter clarifying applicable statutory and regulatory requirements regarding the taxation of Medicaid MCOs.
In the letter, CMS explains that taxes only on Medicaid MCOs, like the one in Pennsylvania, “are not consistent with applicable statutory and regulatory requirements because they target Medicaid providers and treat such providers differently for purposes of the tax from other individuals or entities.”
A tax is considered “health care-related” if it is related to health care items or services, the provision of or ability to provide health care items or services, or the payment for health care items or services. Health care-related taxes include taxes that provide for different or unequal treatment for individuals or entities that are paying for or providing health care items or services. A tax may also be considered “health care-related” if 85 percent or more of the tax burden falls onto health care providers. The 85 percent threshold provision does not establish a safe harbor, meaning that taxes “must still be analyzed to determine if there is equal treatment of providers or payers in the design and application of the tax,” according to CMS. If there is unequal treatment among providers, then a tax may still be health care-related even if less than 85 percent of the burden is on health providers.
When the OIG issued its report on Pennsylvania’s Medicaid MCO tax, Pennsylvania argued that the tax is not health care-related because several entities are subject to the gross receipts tax, not just Medicaid MCOs.
The CMS letter explains that Pennsylvania’s argument is based on an incorrect interpretation of statutory requirements.
In 2009, when new federal requirements went into effect, all managed care organizations became taxable, not just Medicaid MCOs. Pennsylvania incorporated MCOs into its existing gross receipts tax to comply with the new requirements. However, only Medicaid MCOs became subject to the tax.
According to CMS, taxing a subset of health providers at the same rate as another existing tax, such as a sales tax or gross receipts tax, causes unequal treatment because one subset of providers is treated differently than all providers in that class. In Pennsylvania’s case, Medicaid MCOs are being treated differently than other MCOs. And even though less than 85 percent of the entire gross receipts tax burden falls on Medicaid MCOs, the tax on Medicaid MCOs is considered a health care-related tax because of the unequal treatment among the class.
States will now have to ensure that their taxation of Medicaid MCOs complies with this CMS guidance. CMS advises states to “make any changes necessary to achieve compliance as soon as feasible, but no later than the end of their next regular legislative session.” In response to the OIG report, CMS said that it “will not pursue financial recoveries for periods prior to issuance of the national guidance.” But states may not be safe now that national guidance has been issued.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How should Medicaid MCOs be taxed?
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