Five Reasons Why the Governor’s “MCO Tax” Proposal Deserves the Legislature’s Support

Proving that persistence pays off, Governor Brown is on the verge of closing a deal to restructure and extend the state’s current tax on health plans, which generates more than $1 billion each year to support critical health care services that low-income Californians receive through Medi-Cal, our state’s Medicaid program. Revamping this managed care organization (MCO) tax is a must-do because the current version of the tax runs afoul of stringent new federal guidelines. (See our primer for more information about the MCO tax and the special session that the Governor called to fix it.)

This week, the Governor’s MCO tax proposal was introduced in each house of the Legislature in the form of two identical bills: Assembly Bill x2 20 and Senate Bill x2 15. As with any state tax increase, moving one of these bills to the Governor’s desk requires a herculean two-thirds vote of both the Assembly and the Senate. Because Democrats fall short of this supermajority threshold in each house, at least a few Republican votes are needed to put a renewed MCO tax on the books by July 1, when the current tax expires.

Why should lawmakers, Democrats and Republicans alike, support the Governor’s proposal to restructure and extend the MCO tax? As Lucy famously said to Linus, “I’ll give you five good reasons”:

1. The health insurers that would pay the new MCO tax overwhelmingly support or have taken a neutral position on the Governor’s proposal.

This includes the California Association of Health Plans, which earlier this week issued a statement backing the Governor’s proposal. Health insurers’ general lack of opposition at least partly reflects the fact that the Governor has wrapped the revised MCO tax into a broader tax reform package that includes offsetting tax cuts. This package is estimated to result in net savings of $90 million to the health insurance industry. Needless to say, it’s harder to justify a vote against a tax increase when the industry that will pay the tax generally doesn’t have a problem with it.

2. The MCO tax reduces — or “offsets” — state spending on Medi-Cal by more than $1 billion per year, freeing up these dollars to support other state priorities.

This “offset” is the result of a complex financing arrangement that’s at the heart of the MCO tax. (For the details, see this report from the Legislative Analyst’s Office.) This General Fund “offset” will evaporate if a new MCO tax is not in place by July 1, leaving a roughly $1 billion shortfall in the 2016-17 state budget — and setting up the possibility of deep cuts to Medi-Cal and other public services and systems that rely on General Fund support.

3. The MCO tax brings in over $1 billion in additional federal funds for Medi-Cal each year, helping to stabilize funding for the program and benefitting communities across the state.

The federal dollars generated by a restructured MCO tax would provide a stable source of funding for Medi-Cal during the three years that this tax would remain in effect under the Governor’s proposal. These federal dollars would flow to doctors, clinics, and other health care providers throughout California, boosting local economies and supporting vital health care services for the more than 13 million Californians enrolled in Medi-Cal. Children, in particular, are key beneficiaries of a stronger Medi-Cal program: In each of California’s 58 counties, at least one-third of children ages 0 to 5 receive health care services through Medi-Cal, and in more than half of the counties this proportion exceeds 60 percent, according to a new report from the state Department of Health Care Services.

4. By bringing in additional federal dollars for Medi-Cal, the MCO tax allows California to come closer to claiming its fair share of federal Medicaid funding.

It’s long been known that the main formula for determining how much federal funding states receive for their Medicaid programs is flawed, and in a way that puts California at a financial disadvantage. (This formula is officially known as the “FMAP.”) For California, the key problem is that the state “receives a low federal matching rate despite its relatively low ability to fund [Medi-Cal] program services,” according to the US Government Accountability Office (GAO). By providing another way for California to tap federal Medicaid funds — and at no cost to the state’s General Fund — the MCO tax helps to lessen the inequities that are built into the FMAP formula by boosting federal support for Medi-Cal beyond the level that California would otherwise receive.

5. The Governor’s MCO tax proposal may provide the best opportunity this year to increase state support for services for people with developmental disabilities.

Payment rates have been a perennial concern for providers in the state’s developmental services system. A payment freeze in effect since 2006 — combined with other policy changes — has prompted providers and advocates to argue that the system is “on the brink of collapse.” While funding for developmental services is not included in the Governor’s current proposal, some insiders have suggested that it could be part of the final MCO tax agreement.

News reports suggest that a final MCO tax deal could be voted on as early as next week, assuming that enough legislators rally around the Governor’s plan. From our point of view, there are “five good reasons” for lawmakers to take prompt action on passing a renewed MCO tax, bringing both funding stability to the Medi-Cal program and a positive end to a yearlong policy debate.

— Scott Graves