BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 1422 - Bass
Amended: August 24, 2009
Hearing: August 26, 2009 URGENCY Fiscal: Yes
SUMMARY: Provides that Medi-Cal managed care plans would be
subject to the gross premium taxes, which are
levied pursuant to section 28 of article XIII of
the California Constitution. Increases, in
specific circumstances, the premiums paid by
families for children enrolled in the Healthy
Families Program. Provides administrative rules
for distributing the additional revenue.
EXISTING LAW
Existing federal law:
Establishes the Medicaid program which provides
comprehensive health coverage to low-income eligible
individuals and families, including children; the aged,
blind, and disabled; and pregnant women, through a program
that reimburses states for the Medicaid programs in the
individual states. Requires states to set actuarially
sound rates for Medicaid managed care plans.
Establishes the Children's Insurance Fund (CHIP) which
provides matching funds for state health insurance
programs.
Existing State Law:
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Gross Premiums Tax & Corporate Tax
Requires insurers (generally defined as property insurance,
life insurance, casualty insurance, some preferred provider
organizations and some point of service plans to pay a tax
based upon gross premiums received. Establishes that the
premium tax is 2.35 percent of annual gross premiums and is
in lieu of all other taxes and licenses upon insurers and
their property with certain specified exceptions (e.g.,
taxes upon real estate and DMV license fees). This tax is
established in the California Constitution, section 28 of
article XIII.
Thus, insurers do not pay tax on other forms of income,
such as investment income, or income earned from other
trades or businesses. In fiscal year 2007-08, the gross
premiums tax raised approximately $2.2 billion in state
General Fund revenues. Most other states also have a
state-level gross premiums tax.
Health care plans (including all HMOs and some PPOs) are
subject to California's general tax on corporations. Unless
otherwise provided by law, corporations doing business or
incorporated in California must pay a franchise tax equal
to the greater of the minimum franchise tax of $800 or an
amount measured by net income multiplied by the current tax
rate, which is 8.84%.
Any health care provider determined by the Department of
Insurance not to be subject to the gross premiums tax, is
subject the Corporation Tax Law. Under the Corporation Tax
Law, a health care provider not subject to the gross
premiums tax is a general C corporation and generally pay
franchise or income tax. Under the Corporation Tax Law,
health care providers may qualify as an exempt (charitable)
organization and only be subject to franchise or income tax
on the organization's unrelated business income. Thus,
health care providers not subject to the gross premiums
tax, may be for or profit or non-profit".
DMHC:
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Health plans that operate under the regulation of the DMHC
("managed care" plans that include HMOs, some preferred
provider organizations or PPOs, and hybrid plans called
"Point of Service") are subject to the Knox-Keene Act: an
extensive array of consumer protection requirements,
minimum benefit packages, and limitations on the amount of
co-payments and deductibles.
The Knox-Keene Act, under the administration of DMHC,
health care providers such as HMOs and PPOs may not be
subject to the gross premiums tax.
DOI:
Health insurance that is offered under the DOI's regulatory
structure includes traditional fee-for-service
arrangements, and some preferred provider organization, or
PPO plans. In contrast to DMHC-licensed arrangements,
however, DOI-licensed plans are subject to different
consumer requirements, have a less extensive minimum
benefits package, and are allowed to have higher
co-payments and deductibles than managed care plans.
The Department of Insurance determines what companies are
subject to the gross premiums tax.
State Health Programs:
Medicaid program known as Medi-Cal: administered by the
Department of Health Care Services (DHCS), which provides
comprehensive health benefits to low-income children, their
parents or caretaker relatives, pregnant women, seniors,
persons with disabilities, nursing home residents and
refugees who meet specified eligibility criteria.
Authorizes DHCS to contract, on a bid or nonbid basis, with
any qualified individual, organization, or entity to
provide services to, arrange for, or case manage, the care
of Medi-Cal beneficiaries.
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California Children and Families Program (CCFP): created
by the enactment of Proposition 10 in November 1998, and is
funded by a tax on tobacco products equivalent to $.50 per
pack of cigarettes. Creates the California Children and
Families Trust Fund (Trust Fund) to receive revenue from
the tax on tobacco products and requires the revenues to be
appropriated for the purposes of promoting, supporting, and
improving the development of children from birth to five
years of age and to offset certain revenue losses to
Proposition 99 programs. Allocates funds for specified
purposes and places those allocated funds in specified
accounts.
Healthy Families program : provides low-cost insurance,
including health, dental and vision coverage to children
who do not have health insurance, do not qualify for free
Medi-Cal and are in families at or below 250 percent of the
FPL.
THIS BILL
Gross Premiums Tax Increase:
Provides that Medi-Cal managed care plans are subject to
the gross premium taxes established by section 28 of
article XIII of the California Constitution. This section
of the constitution establishes the gross premiums tax and
would therefore subject Medi-Cal managed care plans to the
gross premiums tax rate of 2.35 percent.
Provides that the funds raised will be continuously
appropriated to DHCS for ensuring that the Medi-Cal managed
care plans receive contracted rates of payment for services
that are actuarially sound and any additional revenues
shall be used by MRMIB for the Healthy Families program.
Provides that the gross premiums tax will be paid on total
operating revenue of Medi-Cal managed care plans,
including, but not limited to, Medi-Cal services.
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Amends the laws governing the gross premium tax for
insurers to include Medi-Cal managed care plans, including
provisions related to timing of payments, handling of
overpayments, prepayment requirements, penalties and method
and procedures for filing returns. Renders the provisions
related to the gross premium tax for Medi-Cal managed care
plans inoperable on January 1, 2011.
Provides that the provisions of the bill are inoperable if
specified conditions occur, including lack of federal
approval and matching funds, the revenues raised by the
premiums tax are diverted to purposes that are not
contained in this bill and a judicial determination that
this tax is found to be in lieu of all other taxes.
Directs DHCS to use the funds attributable to the tax on
managed care plan for ensuring that the Medi-Cal managed
care plans receive contracted rates of payment for services
that are actuarially sound. Provides for a delay in paying
the tax due if DHCS has not met their statutory obligations
related to calculating rates and making payments. Allows
DHCS to retroactively increase rates and make payments to
plans.
Declares legislative intent that these are in furtherance
of the California Children and Families Act of 1998, an
initiative statute.
Authorizes the Director of Finance to make necessary budget
adjustment to allow the expenditure of funds allocated by
the California Children and Families Commission. Requires
that appropriate committees of the Legislature be notified
within 30 days.
Declares that this bill is an urgency statute in order to
address important issues related to health care.
Healthy Families Premium Increase:
Increases, commencing November 1, 2009, the premiums paid
by certain families for children enrolled in the Healthy
Families Program. Provides that the monthly increase will
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only apply for families whose income is greater than 150
percent of the federal poverty level, with families whose
family income exceeds 200 percent paying a greater
increase. Requires the Managed Risk Medical Insurance
Board (MRMIB) to notify families of the increase in
premiums and provide them an opportunity to demonstrate
that their family income has decreased making them eligible
for a lower premium.
Insurance providers would only increase the healthy
families premiums in the event that the two lines of
business are separate.
Proposition 10 Commission, CCFP:
Grants the California Children and Families Commission the
authority to transfer funds that are allocated to the state
commission, but are not needed for the specific purposes as
directed in law to the Unallocated Account. The specific
accounts from which the state commission may transfer funds
are the Mass Media Communications Account, the Education
Account, Child Care Account, and Research and Development
Account.
MRMIB may draft regulations to promulgate the provisions of
this bill.
FISCAL EFFECT:
According the Department of Healthcare Services (DHS), this
bill will raise approximately $97 million in General Fund
dollars as follows:
This bill will result in significant matching of federal
dollars as follows:
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Medi-Cal managed care plans have previously been
assessed a Quality Improvement Fee which generated
revenues that were matched by the federal government.
Federal law eliminated this fee and therefore the
matching program. This measure imposes the gross
premiums tax on Medi-Cal managed care plans which
these plans currently do not pay.
These "new" funds would be used as matching funds
to stabilize the state's Medi-Cal and Healthy
Families' programs pursuant to the following
percentages: 38.41% of total revenues to the Medi-Cal
program and 61.59% of total revenues to the Healthy
Families program. (As proposed to be amended)
Under the federal stimulus package (ARRA), the
state is currently receiving an enhanced level of
reimbursement through the Medi-Cal program. The
enhanced match will be applied to the revenues that
are generated through the gross premiums tax.
The measure has a continuous appropriation that
would direct the additional revenues to maintain the
level of funding in the Healthy Families' Program.
Healthy Families has a 65-35 match.
COMMENTS:
A. Purpose of the Bill
Uninsured children reported slightly lower health status
than those enrolled in Medi-Cal or Healthy Families. Over
three-fourths of insured children or their parents reported
their health as "excellent" or "very good," while less than
half of uninsured children reported the same. Uninsured
children were also more than three times as likely to
report their health status as "fair" or "poor" than those
with job-based coverage. Nearly half of the uninsured
reported no usual source of care and were only half as
likely as those with Medi-Cal to list a doctor's office or
health maintenance organization as their usual source of
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care and only one-third as likely as those with job-based
coverage or individually purchased private insurance. Over
50 percent of the uninsured cited lack of insurance or cost
as a reason for not having a usual source of care, compared
to about 33 percent of those with Medi-Cal or other public
coverage and less than one percent of those with job-based
or individually purchased coverage.
This bill will take a significant step towards combating
the uninsured children population in this state.
B. How Insurance Companies Are Taxed
In California, insurance companies are subject to the gross
premiums tax. Since their activities have already been
taxed in this manner, to also include their income on their
parents' combined Corporate Tax (CT) returns would result
in double taxation. Insurance subsidiaries are, therefore,
an exception to the general rules for corporations
regarding combined reporting. Their income and expenses are
not considered in the calculation of their parents' taxes.
The economics of the insurance industry is a key reason for
the special treatment of insurance companies. Most CT
taxpayers calculate their income by subtracting costs
incurred in the production of a good or service from the
revenues received from their sale. Insurance companies, by
contrast, collect their revenues up front, then make
payments to policyholders based on contingent events that
occur many months or years later. Thus, it can be difficult
to "match up" revenues to related expenses. In an income
tax framework, insurers ideally would be allowed to deduct
the current value of all future obligations (claims)
covered by the insurance policies they have written when
calculating their taxable income for a given year. Because
the actual amount of these obligations is uncertain, as are
the amount of investment earnings on accumulated premiums
received during the intervening period, an accurate
determination of the theoretically appropriate amount of
taxable income proves very difficult to achieve in
practice. For this reason, a premiums tax was adopted.
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C. Who is subject to the Gross Premiums Tax?
Health plans that operate under the regulation of the DMHC
("managed care" plans that include HMOs, some preferred
provider organizations or PPOs, and hybrid plans called
"Point of Service"), including Medi-Cal managed care plans
are subject to the Knox-Keene Act. Generally these plans
are not subject to the gross premiums tax.
The Medi-Cal managed care plans do currently pay a provider
fee. Federal law authorizes states to levy fees on health
care providers if the fees meet federal requirements. Many
states (including California) fund a portion of their share
of Medicaid Program costs through a fee on health care
providers. Under these funding methods, states collect
funds (through fees, taxes, or other means) from providers,
which can then be matched with federal funds. The
resulting combination of state and federal funds is then
used to increase Medicaid reimbursement to providers.
California currently has provider fees on intermediate care
facilities for the developmentally disabled, Medi-Cal
managed care plans and skilled nursing facilities. The
provider fee on Medi-Cal managed care plans, termed a
quality improvement fee (QIF), is assessed on Medi-Cal
managed care plans at a rate of 5.5 percent of revenues.
The net increase in revenue is deposited into the state
general fund, and is estimated to be $238.8 million (total
funds) in 2008-09. Half of the fee is used to draw down
federal funds and is returned to the Medi-Cal managed care
plans through increased rates The QIF is currently assessed
on Medi-Cal managed care revenue, but changes in federal
law will result in this fee sunsetting on October 1, 2009
as it no longer complies with federal requirements. To
prevent states from only levying an assessment on certain
providers, federal law now requires provider fees to be
"broad based" and uniformly imposed throughout a
jurisdiction, meaning that they cannot be levied on a
subgroup of providers, such as only those who are enrolled
in Medicaid programs.
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Because the gross premiums tax is an existing tax on a
broad group of insurers, the overwhelming majority of which
are not health care insurers, it can be extended to
Medi-Cal managed care plans without being considered a
provider fee under federal law. As such, the state does
not have to meet federal requirements for provider fees to
obtain federal matching funds.
D. Advantages of the Gross Premiums Tax
There are plusses and minuses associated with relying on a
gross premiums tax instead of an income tax to tax
insurers. The primary advantage of the gross premiums tax
is its administrative simplicity. In addition, revenues
from the premiums tax are much less volatile over time than
those from an income tax, thus making budgetary management
easier. This is because premium income does not bounce
around much from year to year. (On the other hand,
insurance claims, and, hence, the net income of insurers,
vary substantially from year to year due to the sporadic
nature of events such as natural disasters.)
The administrative simplicity makes it the best candidate
for these purposes.
E. Author will offer amendments
The author will offer the following amendments (see note
below); if possible, these amendments will be in print on
the same day as the committee hearing.
Clarify that dental plans are not subject
to the gross premiums tax. (Removes "concerns"
of dental plans).
Clarify the percentage allocation to the
Medi-Cal program at 38.41% of total revenues and
to the Healthy Families program at 61.59% of
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total revenues.
Technical, conforming amendments.
F. AB 1422 is double referred and a fiscal bill
After hearing in this committee, this bill will be heard by
the Senate Health Committee on the same day. Any
amendments agreed to in this committee will need to be
taken in the Appropriations Committee Committee.
Support and Opposition
Support:California Association of Health Plans
Health Access
Local Health Plans of California
Oppose:None received.
Concerns:California Association of Dental Plans
(concerns addressed by amendments)
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Consultant: Gayle Miller