BILL ANALYSIS
AB 1422
Page 1
Date of Hearing: September 2, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1422 (Bass) - As Amended: August 25, 2009
2/3 vote. Urgency. Fiscal committee.
SUBJECT : Medi-Cal managed care plans: gross premiums tax.
SUMMARY : Imposes a tax at the rate of 2.35% on the total
operating revenue of Medi-Cal managed care plans, increases, in
specific circumstances, the premiums paid by families for
children enrolled in the Healthy Families Program, and provides
the California Children and Families Commission with increased
flexibility to transfer moneys among its various funds.
Specifically, the tax-related provisions of this bill :
1)Impose, until January 1, 2011, a tax at the rate of 2.35% on
the total operating revenue of a Medi-Cal managed care plan
(gross premiums tax).
2)Define a "Medi-Cal managed care plan" as any individual,
organization, or entity, other than an insurer or a dental
managed care plan, that enters into a specified contract with
the State Department of Health Care Services (DHCS).
3)Define the term "total operating revenue" as all amounts
received by a Medi-Cal managed care plan in premium or
capitation payments for the coverage or provision of all
health care services including, but not limited to, Medi-Cal
services. The term "total operating revenue" does not include
amounts received by a Medi-Cal managed plan pursuant to a
subcontract with a Medi-Cal managed care plan to provide
health care services to Medi-Cal beneficiaries.
4)Require Medi-Cal managed care plans to make prepayments of the
gross premiums tax for the current calendar year and specify
that the amount of each prepayment shall be 25% of the
estimated annual amount of the tax. Provide that no
prepayment is required prior to the effective date of the bill
and that no penalties and interest will be imposed for failing
to make those prepayments.
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5)Provide that the gross premiums tax imposed on Medi-Cal
managed care plans is due and payable on or before April 1st
of the year following the calendar year in which the plan
contracted with the Department of Managed Health Care (DMHC).
6)Require each Medi-Cal managed care plan to make payments by
electronic funds transfer, as defined by Insurance Code
Section 45.
7)Make existing provisions governing the gross premiums tax for
insurers, relating to timing of payments, handling of
overpayments, prepayment requirements, penalties and methods
and procedures for filing returns, applicable to Medi-Cal
managed care plans.
8)State that the revenues derived from the imposition of the
gross premiums tax on Medi-Cal managed care plans will be
continuously appropriated as follows:
a) Thirty-eight and four-tenths percent (38.41%) to DHCS
for purposes of the Medi-Cal managed care program.
b) Sixty-one and six-tenths percent (61.59%) to the Managed
Risk Medical Insurance Board (MRMIB) for purposes of the
Healthy Families Program.
9)Require the Insurance Commissioner to report the amount of
revenue derived from the imposition of the gross premiums tax
on Medi-Cal managed care plans to the California Health and
Human Services Agency, the Joint Legislative Budget Committee,
and the Department of Finance (DOF).
10)Grant 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, the Child Care Account, and the Research and
Development Account. Declare legislative intent that these
amendments are in furtherance of the California Children and
Families Act of 1998, an initiative statute.
11)Provide that this bill shall have no force or effect if any
of the following occurs:
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a) There is a final judicial determination, or a final
determination by the administrator of the federal Centers
for Medicare and Medicaid Services, that federal financial
participation is not available with respect to any payment
made under the methodology implemented pursuant to this
act.
b) The revenues derived from the imposition of the gross
premiums tax on Medi-Cal managed care plans are diverted in
whole, or in part, from the Medi-Cal program or the Healthy
Families Program.
c) There is a final judicial determination that the gross
premiums tax imposed pursuant to this bill on Medi-Cal
managed care plans is required to be in lieu of all other
taxes, as described in Revenue and Taxation Code (R&TC)
Section 12204.
12)State that, if there is a delay for any reason in
establishing the capitation rates payable to health plans
participating in the Medi-Cal managed care program, as
described in Welfare and Institutions Code Section 14301.1, in
the 2009-10 rate year or in any other rate year, both of the
following apply:
a) A Medi-Cal managed care plan subject to the tax imposed
by this bill shall be assessed the amount the plan will be
required to pay, but shall not be required to pay the tax
until the DHCS meets all of its required obligations.
b) DHCS may retroactively increase rates and make payments
to plans.
13)Provide that no reimbursement is required by this bill
because the only costs that may be incurred by a local agency
or school district will be incurred because this bill creates
a new crime or infraction, eliminates a crime or infraction,
or changes the penalty for a crime or infraction, or changes
the definition of a crime.
14)Authorize the DOF to make necessary budget adjustments to
allow the expenditure of funds allocated by the California
Children and Families Commission. Require that the Joint
Legislative Budget Committee and the fiscal and appropriate
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policy committees of the Legislature be notified of those
adjustments, including a description of the revenues and
expenditures, within 30 days.
15)Declare that this bill is an urgency statute in order to
address important issues related to health care.
EXISTING FEDERAL LAW establishes the:
1)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.
2)Children's Health Insurance Program, which provides matching
funds for state health insurance programs.
EXISTING STATE LAW :
1)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.
2)Establishes that the premium tax is 2.35% 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 Department of Motor Vehicles
license fees). (Section 28, Article XIII, California
Constitution; Part 7, Division 2, R&TC).
3)Subjects health plans that operate under the regulation of the
DMHC ('managed care' plans that include health maintenance
organizations (HMOs), some preferred provider organizations or
preferred provider organizations (PPOs), and hybrid plans
called 'Point of Service') to the Knox-Keene Health Care
Service Plan Act of 1975 [Chapter 2.2 (commencing with Section
1340), Division 2, Health and Safety Code (H&SC)].
4)Imposes a franchise tax on corporations doing business or
incorporated in California 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%. Health
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care plans (including all HMOs and some PPOs) are subject to
California's general tax on corporations. In addition, any
health care provider determined by the Department of Insurance
not to be subject to the gross premiums tax, is subject to the
Corporation Tax (CT) Law. Under the CT Law, a health care
provider that is not subject to the gross premiums tax and is
a "C" corporation, generally pays a franchise or income tax.
5)Imposes a regulatory fee and a licensure fee on health care
service plans applying for licensure with the DMHC. (H&SC
Section 1356).
6)Establishes a Medicaid program, known as Medi-Cal, which is
administered by the DHCS. Medi-Cal 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
specific eligibility criteria.
7)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.
8)Establishes the California Children and Families Program
(CCFP), which was 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 CCF
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.
9)Provides, under the Healthy Families program, 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% of the
federal poverty level (FPL).
FISCAL EFFECT : According to DHCS, the Senate Health Committee
and the Senate Appropriations Committee's analyses, the gross
premiums tax for Medi-Cal managed care plans is expected to
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raise $157 million on an annual basis. These 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 will go to the Medi-Cal program and
61.59% of total revenues will be allocated to the Healthy
Families program.
COMMENTS :
1)Author's Statement . The author states that, "AB 1422 is an
important, consensus measure that will avoid disenrolling
670,000 children in the state's Healthy Families Program,
which provides health, vision and dental benefits to low
income children. Due to the state's fiscal crisis and the
resulting General Fund reductions, the Managed Risk Medical
Insurance Board requires approximately $196 million in order
to support the Healthy Families program. The program has been
closed to all new enrollments since July and absent a
solution, will begin disenrolling children in October. This is
a shared responsibility approach, with plans voluntarily
imposing the gross premiums tax on their Medi-Cal managed care
entities, the State First 5 Commission pledging $81.4M towards
the state share of premiums for children ages 0 - 5, and the
subscribers themselves facing increased premiums and co-pays."
2)Purpose of this Bill : This bill would accomplish several
goals. First, it would impose a tax at the rate of 2.35% on
the total operating revenue of a Medi-Cal managed care plan,
similar to the existing tax imposed on the gross premiums of
an insurer pursuant to Section 28 of Article XIII of the
California Constitution. It also would increase, beginning on
November 1, 2009, the premiums paid by certain families for
children enrolled in the Healthy Families Program. Finally,
it would grant 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.
Currently, intermediate care facilities for the developmentally
disabled, skilled nursing facilities, and Medi-Cal managed
care plans, which operate in 23 of California's 58 counties,
are subject to a Quality Improvement Fee (QIF) of 5.5% of
their annual revenues. Half of the fee is used to draw down
federal funds and is returned to the Medi-Cal managed care
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plans through increased rates. Changes in federal law will
result in the discontinuation of this fee on October 1, 2009,
because the fee will no longer comply with federal
requirements. The matching program will be discontinued as
well. Existing federal Medicaid law permits states to assess
provider taxes to be used as non-federal Medicaid matching
funds. However, that law requires that a provider tax be
"broad-based" and be imposed throughout a jurisdiction in
order to prevent states from only levying an assessment on
certain providers, meaning that they cannot be levied on a
subgroup of providers, such as only those who are enrolled in
Medicaid programs. In addition, payers of the tax may not be
"held harmless" for their portion of the tax. The QIF would
have violated those provisions and, therefore, will be
eliminated.
The gross premiums tax proposed to be imposed on Medi-Cal
managed care plans by this bill is "broad-based", assessed on
a broad group of insurers, the overwhelming majority of which
are not health care insurers. This tax is not a provider fee
under federal law, and as such, does not have to meet federal
requirements for provider fees for purposes of obtaining
federal matching funds.
State Medi-Cal monies are usually matched dollar for dollar by
the federal government. However, as a result of the American
Reinvestment and Recovery Act (ARRA) enacted in February of
2009, the Federal Matching Medical Assistance Percentage was
increased from 50% to 61.59%. Consequently, from October 1,
2008 through December 31, 2010, the federal government would
pay for approximately 61.59% of benefit-related Medi-Cal
expenditures, and the state would pay for 38.41% of those
expenditures.
This bill is intended to address the problem of the funding
shortfall in the Healthy Families Program, which is facing, in
this fiscal year, a $196 million shortfall in state funds, as
a result of the budget and other actions. As a result of this
shortfall, the state will not be able to use approximately
$400 million in federal funds, and will have to disenroll
approximately 500,000 children. This bill would take a
significant step towards maintaining the existing health
coverage for the uninsured children in California.
3)Gross Premiums Tax : Pursuant to the California Constitution,
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insurance companies are subject to the gross premiums tax
(Section 28, Article. XIII, California Constitution). The
gross premiums tax is an excise tax on insurers for the
privilege of transacting insurance in this state. The related
statutory provisions relating to the assessment and collection
of the tax are contained in Part 7 (commencing with Section
12001) of Division 2 of the R&TC. This tax is imposed in lieu
of other state and local taxes and fees, making an insurer
exempt from paying those charges, other than real property and
motor vehicle taxes and fees.
The economics of the insurance industry provide a key reason for
the special treatment of insurance companies. Most corporate
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.
Insurers subject to the gross premiums tax 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 (GF) revenues. Most other
states also have a state-level gross premiums tax.
4)Current taxation of health care service plans. An "insurer"
is subject to the gross premiums tax. Subdivision (a) of
Section 28 of Article XIII of the California Constitution
defines an "insurer" to include insurance companies and
associations and other entities, but does not expressly
designate health care service plans among them. Under
existing law, a health care service plan is not considered an
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"insurer" and is not subject to the gross premiums tax. A
health care service plan is, generally, distinguished from an
insurer on the basis that it principally provides or arranges
for the provision of health care services, whereas an insurer
indemnifies a person for the costs incurred for those
services. As such, health care service plans are regulated by
a system distinct from that which governs the operation of
insurance companies.
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, but instead, 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%.
Further, health insurance that is offered under the Department
of Insurance's (DOI) regulatory structure includes traditional
fee-for-service arrangements, as well as some preferred
provider plans. In contrast to DMHC-licensed arrangements,
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 determines what
health care plans licensed by the department are subject to
the gross premiums tax. Any health care provider determined
by the DOI not to be subject to the gross premiums tax, is
subject to the CT Law.
Under the CT Law, a health care provider may qualify as an
exempt (charitable) organization and be subject to franchise
or income tax only on the organization's unrelated business
income.
As discussed above, the Medi-Cal managed care plans also pay a
provider fee, which will be eliminated on October 1, 2009.
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.
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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.
5)Double-referral . This bill will be heard first by the
Assembly Committee on Health. For a more comprehensive
analysis of this bill, refer to that committee's analysis.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of California Life and Health Insurance Companies
California Association of Health Plans
California Medical Association
California State Association of Counties
Children Now
Children's Defense Fund-California
County Welfare Directors Association
Health Net
Local Health Plans of California
PICO California
Regional Council of Rural Counties
The Children's Partnership
Urban Counties Caucus
Opposition
Howard Jarvis Taxpayers Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098