Overview
The New York State Executive Budget for Fiscal Year (FY) 2026 proposes significant updates to the managed care organization (MCO) provider tax, aiming to enhance Medicaid funding through innovative financial strategies. The budget proposes amendments to codify the tax structure and plan for spending over the next three years, with a projected $3.7 billion in savings to the state. The tax applies to health plans offering Medicaid managed care plans in the state and is assessed based on Medicaid member months, with varying rates depending on plan types. The tax is intended to ultimately be revenue-neutral on health insurers. It achieves neutrality by increasing the state’s Medicaid revenue, prompting the Centers for Medicare & Medicaid Services (CMS) to release matching funds, at which point the state effectively refunds the tax to health plans. The New York State Assembly and Senate will review the proposed legislation before final approval in April 2025.
In Depth
HISTORY OF THE NEW YORK MCO PROVIDER TAX
The New York State FY 2025 budget instituted the MCO provider tax. The tax effectively increases federal Medicaid funds without additional costs to the state or health plans, as the taxes charged to the health plans are reimbursed through increased capitation payments to those health plans. The increased capitation rates are offset by the amount of the tax, creating an illusory increase in state funding that requires matching funds from CMS, even though the state has not actually incurred additional costs. CMS approved this arrangement in California and New York but plans to close this loophole by 2026. At the time the FY 2025 budget was signed, the tax was projected to yield $4 billion for New York. For a more detailed discussion of the California tax, as well as the initial implementation of the New York MCO provider tax, please refer to our previous On the Subject.
PROPOSED MCO PROVIDER TAX LEGISLATION
On January 21, 2025, New York Governor Kathy Hochul released the New York State Executive Budget FY 2026, which proposes to amend the MCO provider tax. The proposed legislation includes language to codify the structure of the proposed MCO provider tax and establish a plan for spending tax receipts over the next three years. The financial plan assumes only two years of MCO tax revenue, totaling $3.7 billion in state savings. The FY 2026 budget includes $1.4 billion in funding, representing the first year’s installment of targeted investments. If enacted as proposed, N.Y. Pub. Health Law Section 2807-ff would be amended to include the following requirements:
- Health plans will pay the MCO provider tax annually based on the number of individuals enrolled in a health plan each month, ranging from $25 – $126 per member month for Medicaid plans, $7 – $13 per member month for essential plans, and $1.50 – $2 per member month for all other plans (e.g., Child Health Plus).
- Health plans must pay the MCO provider tax to the commissioner or their designee every quarter, or as often as the commissioner decides.
- The commissioner or their designee will deposit funds collected from the MCO provider tax, including interest and penalties, in the healthcare stability fund.
- Every health plan subject to the MCO provider tax must submit reports in a format specified by the commissioner of the Department of Health (DOH) to accurately disclose required information. If a health plan fails to submit these reports within 60 days of the due date and after being notified of the delinquency, the commissioner may impose a civil penalty of up to $10,000 for each failure. However, this penalty will not be imposed if the health plan demonstrates good cause for the delay.
- If a health plan’s payment is late, interest will be charged at the same rate and manner as defined in N.Y. Pub. Health Law § 2807-j. The commissioner can waive some or all of the interest or penalties if the health plan shows that paying the full amount on time would cause significant financial hardship or affect services to Medicaid beneficiaries. The commissioner can also waive these charges if the health plan didn’t have the necessary information from the DOH to pay on time. Any overpayments will be applied to future payments or refunded, with interest paid on overpayments only if directed by the commissioner and if the amount is more than one dollar.
The healthcare stability fund consists of money received from CMS and the MCO provider tax. DOH can use the healthcare stability fund to cover the state’s share of increased capitation payments to health plans. This ensures that while the new MCO provider tax is being implemented, health plans will not be negatively affected, as the cost of the MCO provider tax imposed on the health plans will be offset by higher payments from the state.
The New York State Assembly and Senate will now examine the executive budget. They may suggest changes or decide to remove the MCO provider tax proposal entirely before giving their approval to the final FY 2026 state budget. The budget is required to be signed into law by April 1, 2025. We will continue to monitor the process and provide updates as they become available.
