New York State Budget Institutes Revenue-Neutral Health Plan Tax

BACKGROUND: THE CALIFORNIA MODEL

The New York State tax established in the 2024 – 2025 budget is widely recognized as modeled on a similar tax implemented in California starting on January 1, 2024. In California, the state introduced an arrangement whereby:

1. The state would tax health plans a certain amount.
2. That tax revenue would be spent by the state Department of Health Care Services on Medi-Cal, California’s Medicaid program, which would use those funds to reimburse claims submitted by the taxed health plans.
3. The federal government, via the Centers for Medicare & Medicaid Services (CMS), would then reimburse the state that same amount of the tax because of the dollar-for-dollar funding for Medicaid reimbursement.

The interesting feature of this arrangement is that the health plans can be made whole for the initial tax once the federal funding is received by the state. Given that health plans contract with the state to receive capitation payments, a state can increase its capitation payments to equal the value of the tax, then pay the health plans from the federal funds received to make the health plans whole for the tax that they paid.

In short, if the state taxes health plans $X, and it spends that value on Medicaid reimbursement, then the federal government will pay the state a matching $X, producing $2X for only $X of tax revenue collected, with the additional feature mentioned above; namely, that taxes collected from health plans would be effectively returned to those entities via appropriately tailored capitation payments. The effect of the tax is to produce additional federal funding with no cost to the state or its health plans.

The California method of harnessing the spending power of the federal government is well known at this point. California publicized its approach, and CMS approved it.

However, CMS’s approval of the California health plan tax arrangement was begrudging. The approval letter projects an end date for reimbursement by CMS in 2026, and it included an additional “companion” letter expressing disapproval of California’s arrangement. The companion letter stated explicitly, “CMS intends to develop and propose new regulatory requirements through the notice-and-comment rulemaking process to address this issue.” New York, however, appears to have exploited the loophole prior to CMS closing it through rulemaking.

ANALYSIS: THE NEW YORK MODEL

The enacted New York state budget provides for the amendment of the New York Public Health Law to include a new section 2807-ff, named “New York managed care organization [(MCO)] provider tax.” Although the statutory name for the tax is the “MCO provider tax,” it applies to health plans more broadly. That section provides that the commissioner of health of the state of New York, subject to the approval of the director of the budget, must:

1. Apply for a waiver or waivers of the broad-based and uniformity requirements related to the establishment of a New York managed care organization provider tax in order to secure federal financial participation for the costs of the medical assistance program.
2. Issue regulations to implement the health plan tax.
3. Subject to approval by CMS, impose the health plan tax as an assessment upon insurers, health maintenance organizations, and managed care organizations offering Medicaid managed care plans, Children’s Health Insurance Program (CHIP) plans, essential plans, exchange plans, and other managed care or insurance plans.

The only other treatment of the health plan tax in the budget legislation is a requirement that the health plan tax comply with all relevant provisions of federal laws, rules and regulations.

Rates and other information relating to the tax have not been identified and will be established later via regulation, but the present expectation is that the health plan tax will generate $4 billion by way of a federal reimbursement arrangement similar to the one employed in California as discussed above. To keep affected healthcare industry participants informed, we will continue to monitor and review upcoming regulations as soon as further details relating to the health plan tax are available.

FURTHER READING

The health plan tax budget provision dovetails with recent efforts in New York to reimagine and restructure the state Medicaid program. In January 2024, CMS approved a Section 1115 waiver for New York, which we covered in a previous On the Subject article. We will continue to provide updates on developing trends in the New York Medicaid space.