After more than a year, California’s politicians and health insurers have finally agreed to and passed last month what California Healthline calls a “tax hike in name only” to finance Medi-Cal. If only it were that simple. Funded jointly by the state and federal governments, Medi-Cal is the subject of perverse political incentives to hike taxes and spend more money on this welfare program, impoverishing treasuries. California and the nation need a new way to finance Medicaid.
Gov. Jerry Brown first proposed a new Managed Care Organization tax back in January 2015. It would replace a similar tax that would no longer be acceptable to the federal government by July 31. The current tax is a 3.9 percent levy on all revenues earned by Medi-Cal Managed Care Organizations, which are operated by private insurers. It raised $1.2 billion in fiscal year 2015-16. That seems straightforward enough. So why does the Obama administration disapprove of this tax?
Medicaid has a horrible financing mechanism: Federal transfers to states are not based on the number of poor people, or any other reasonable calculation. Instead, they depend on the amount of its own taxpayers’ money a state spends. Traditionally, when California spent $1 on Medi-Cal, the federal government kicked in $1. After Obamacare passed in March 2010, more people became eligible for Medi-Cal because California agreed to accept the federal funds and expand its Medi-Cal program. For the newly eligible, the federal government pays the entire cost through 2017, sliding down to 90 percent in 2020.
So, state politicians hike taxes and spending on their own citizens in order to get as much funding as possible from people in other states (via the feds). Hospitals and Medicaid MCOs maximize this by agreeing to a state tax on themselves, which the state uses to ratchet up the federal funding. After multiplication, the money goes right back to these providers.
The Obama administration – which bears the greatest responsibility for fueling this “race to the bottom” by expanding Medicaid via Obamacare – has tried to clamp down on the abuse. In 2014, it notified the state of California that revenue from the current MCO tax would no longer be allowed in the game after this fiscal year.
The reason given is that the tax is levied only on Medicaid MCOs, and is, therefore, obviously only for the purpose of ratcheting up federal dollars transferred to the state. California’s politicians and MCOs set about gaming the system by conjuring up another MCO tax that applies to all MCOs, not just Medicaid MCOs. Obviously, non-Medicaid MCOs rebelled. So, over the past year, they have rigged up a convoluted, Rube Goldberg tax with four “tiers” of taxation (plus one just for Kaiser Permanente) and rebates of corporate and gross premium taxes to compensate the non-Medicaid MCOs.
Gross revenues from the new MCO tax for FY 2016-17 will be $2.38 billion. $740 million will go to transfers between the Medicaid MCOs to compensate for moving from a simple, flat rate to a confusing system of three tiers. $371 million will cover the reduced funding from the corporate and gross premiums tax cuts. Net, that leaves $1.27 billion for Medi-Cal funding, which is about what the current MCO tax would have yielded next year.
A “tax in name only”? More like a game of whack-a-mole. Whatever the MCO tax looks like, it always grows: In two earlier fiscal years, 2010-11 and 2011-12, the total haul was just $422 million. For the last two fiscal years, 2014-15 and 2015-2016, the total was $3.2 billion. It is a prime culprit in out of control Medi-Cal spending growth.
Stopping this wild spending growth requires fundamental reform to Medicaid’s financing. Congressional Republicans have proposed “block grants,” whereby states would get federal Medicaid transfers based on their population of poor residents, not how much they gouge out of their own people. California’s politicians and health plans should encourage such reform, instead of wasting time and energy gaming the current system.