BILL ANALYSIS                                                                                                                                                                                                    Ó



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          Date of Hearing:  February 10, 2016


           ASSEMBLY COMMITTEE ON PUBLIC HEALTH AND DEVELOPMENTAL SERVICES


                                  Rob Bonta, Chair


          ABX2 20  
          (Bonta) - As Introduced February 8, 2016


          SUBJECT:  Medi-Cal:  managed care organization tax.


          SUMMARY:  Reforms the existing managed care organization (MCO)  
          provider tax that is only paid by Medi-Cal managed care plans  
          (MCPs) and replaces it with a tax that would be assessed on  
          health care service plans licensed by the Department of Managed  
          Health Care (DMHC), and/or managed care plans contracted with  
          the Department of Health Care Services (DHCS) to provide  
          services to Medi-Cal beneficiaries, unless exempted, from July  
          1, 2016 to July 1, 2019.  Specifically, this bill: 


          1)Specifies it is the intent of the Legislature that DHCS  
            implement an MCO provider tax, effective July 1, 2016, to  
            provide ongoing funding for health care and prevention, and  
            minimize any need for new reductions to the program, and meet  
            all of the following goals:    a) generate an amount of  
            nonfederal funds for the Medi-Cal program, equivalent to the  
            sales tax currently imposed on MCPs; and, b) comply with  
            federal Medicaid requirements, as specified.


          2)Defines various terms, including the following:










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             a)   Alternate Health Care Service Plan (AHCSP) is a  
               nonprofit health care service plan with at least 4 million  
               enrollees statewide, that owns or operates pharmacies, and  
               provides professional medical services to enrollees in  
               specific geographic regions through an exclusive contract  
               with a single medical group in each geographic region in  
               which it is licensed;


             b)   AHCSP enrollee is an individual enrolled in an AHCSP,  
               who is not a Medi-Cal beneficiary;


             c)   Base year means the 12-month period of October 1, 2014  
               through September 30, 2015;


             d)   Base data source means the quarterly financial statement  
               filings submitted by health plans to DMHC retrieved by DHCS  
               as of January 1, 2016, and supplemented by, as necessary,  
               Medi-Cal enrollment data for the base year as maintained by  
               DHCS and retrieved as of January 1, 2016:


             e)   Countable enrollee means an individual enrolled in a  
               health plan, during a month of the base year according to  
               the base data source.  Excludes from this definition an  
               individual enrolled in a Medicare plan, a plan-to plan  
               enrollee, or an individual enrolled in a health plan  
               pursuant to the Federal Employees Health Benefits Act of  
               1959;


             f)   Excluded plan means a prepaid health plan operating  
               under the laws of Mexico or a health plan owned and  
               operated by a 501(c)(3) hospitals or health systems if that  
               health plan has both a substantial amount of its enrollment  
               in and is headquartered in either the County of Sacramento  
               or San Diego;








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             g)   Health care service plan or health plan is a health care  
               service plan, other than a plan that provides only  
               specialized or discount services, that is licensed by DMHC  
               under the Knox-Keene Health Care Service Plan Act of 1975  
               (Knox-Keene) or a managed care plan contracted with DHCS to  
               provide Medi-Cal services;


             h)   Medi-Cal enrollee is an individual enrolled in a health  
               plan who is a Medi-Cal beneficiary for whom DHCS directly  
               pays the health plan in a capitated payment;


             i)   Other enrollee means an individual enrolled in a health  
               plan who is not a Medi-Cal beneficiary or an AHCSP  
               enrollee; and,


             j)   Plan to plan enrollee means an individual who receives  
               his or her health care services through a health plan  
               pursuant to a subcontract from another health plan.


          3)Imposes a MCO provider tax on each health plan, unless  
            excluded, for the following fiscal years (FY): 


             a)   2016-17; 
             b)   2017-18; and,


             c)   2018-19.


          4)Specifies the following Medi-Cal taxing tiers:










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             -------------------------------------------- 
            |Enrollees          |2016-17 |2017-18|2018-19|
            |                   |        |       |       |
            |-------------------+--------+-------+-------|
            |    0 - 2,000,000  |  $40.00| $42.50| $45.00|
            |-------------------+--------+-------+-------|
            |    2,000,001 to   |  $19.00| $20.25| $21.00|
            |        4,000,000  |        |       |       |
            |-------------------+--------+-------+-------|
            |   Over 4,000,000  |   $1.00|  $1.00|  $1.00|
             -------------------------------------------- 



          5)Specifies the following other taxing tiers:



             -------------------------------------------- 
            |Enrollees          |2016-17 |2017-18|2018-19|
            |                   |        |       |       |
            |-------------------+--------+-------+-------|
            |     0 -4,000,000  |   $7.50|  $8.00|  $8.50|
            |-------------------+--------+-------+-------|
            |     4,000,001 -   |   $2.50|  $3.00|  $3.50|
            |        8,000,000  |        |       |       |
            |-------------------+--------+-------+-------|
            |   Over 8,000,000  |   $1.00|  $1.00|  $1.00|
            |                   |        |       |       |
            |                   |        |       |       |
             -------------------------------------------- 



          6)Establishes the following taxing tier for AHCSP (Kaiser):



             -------------------------------------------- 








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            |Enrollees          | 2016-17|2017-18|2018-19|
            |                   |        |       |       |
            |-------------------+--------+-------+-------|
            |    0 - 8,000,000  |   $2.00|  $2.25|  $2.50|
            |                   |        |       |       |
            |                   |        |       |       |
             -------------------------------------------- 

          7)Establishes the Health and Human Services Special Fund (HHSS  
            Fund) where all revenues, less refunds derived from the taxes  
            specified in this bill, would be deposited to the credit of  
            the HHSS Fund.  Requires that any interest and dividends  
            earned on moneys to be retained in the HHSS Fund for funding  
            the nonfederal share of Medi-Cal managed care rates for health  
            care services furnished to children, adults, seniors and  
            persons with disabilities, and persons dually eligible for  
            Medi-Cal and Medicare.


          8)Requires DHCS to provide an annual report to all health plans  
            accounting for the funds deposited in and expended from the  
            HHSS Fund, as determined by the DHCS Director.  Requires the  
            report to identify the taxes imposed on each health plan and  
            provide an itemized accounting of expenditures from the HHSS  
            Fund.


          9)Requires DHCS to determine for each health plan using the base  
            data source all of the following:  a) total cumulative  
            enrollment for the base year; b) total Medicare cumulative  
            enrollment for the base year; c) total Medi-Cal cumulative  
            enrollment for the base year; d) total plan-to-plan cumulative  
            enrollment for the base year; e) total cumulative enrollment  
            through the Federal Employees Health Benefits Act of 1959;  
            and, f) total cumulative enrollment for the base year that is  
            not otherwise counted in b) to e).  Authorizes the DHCS  
            Director to correct any identified material or significant  
            errors in the data.  Specifies that the DHCS Director's  
            determination on whether to exercise discretion and any  








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            determination made by the DHCS Director is not subject to  
            judicial review, as specified.  Authorizes a health plan to  
            bring a writ of mandate to rectify an abuse of discretion  
            relating to the data specified above.


          10)Requires DHCS to compute the annual tax for each health plan  
            subject to the tax, as specified.


          11)Requires DHCS to collect the annual tax in four installments  
            and to determine the amount due for each installment in the  
            state FY by dividing the annual tax for that state FY by four.  
             


          12)Prohibits DHCS from collecting the tax until it has received  
            approval from the federal Centers for Medicare and Medicaid  
            Services (CMS) that the tax is a permissible health  
            care-related tax and is eligible for federal financial  
            participation (FFP).  


          13)Requires, on October 1, 2016, or the date DHCS receives the  
            federal approval, whichever is later, the following to  
            commence:


             a)   The DHCS Director to certify in writing that the federal  
               approval was received and within five business days, the  
               DHCS to post the certification on its Internet Website and  
               send a copy of the certification to the Legislature and  
               Legislative Counsel;


             b)   By October 14, 2016 or within 10 business days following  
               receipt of the notice of federal approval, whichever is  
               later, DHCS to send a notice to each health plan subject to  
               the tax, to contain:  i) the annual tax due for each FY;  








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               and, ii) the dates on which the four installment tax  
               payments are due;


             c)   Requires a health plan to pay the annual tax in  
               installments, based on a schedule developed by DHCS.   
               Requires DHCS to establish the date that each tax payment  
               is due, provided that the first tax payment is due no  
               earlier than 20 days following the date the department  
               sends the notice specified in b) above, and the tax  
               payments to be paid at least one month apart, but no more  
               than one quarter apart;


             d)   A health plan to pay the taxes that are due, in the  
               amounts and at times set forth in the notice, as specified.  
                The taxes assessed to be deposited in the HHSS Fund; and,


             e)   Interest accrues the day after the date the tax payment  
               is due.  Interest will be assessed for any amount that is  
               not paid on the due date at a rate of 10% per annum.   
               Provides that if a tax payment is more than 60 days  
               overdue, a penalty shall be assessed for each month for  
               which tax payment is not received after 60 days.   
               Authorizes the DHCS Director to waive a portion or all of  
               the interest or penalties or both, if the DHCS Director  
               determines that the imposition of the full amount of the  
               tax pursuant to the timelines has a high likelihood of  
               creating an undue financial hardship for the health plan or  
               creates a significant financial difficulty in providing  
               needed services to Medi-Cal beneficiaries.  Conditions a  
               waiver of the interest or penalties on the health plan's  
               agreement to make tax payments on an alternative schedule  
               that takes into account the financial situation of the  
               health plan and the potential impact on the delivery of  
               services to Medi-Cal beneficiaries.










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          14)Provides that in the event of a merger, acquisition,  
            establishment, or any other similar transaction that results  
            in the transfer of health plan responsibility for all  
            countable enrollees from a health plan to another health plan  
            or similar entity, the resultant health plan shall be  
            responsible for paying the full tax amount upon the effective  
            date of such transaction.  If a merger or acquisition results  
            in the transfer of health plan responsibility for only some of  
            a health plan's countable enrollees, the full tax amount shall  
            remain the responsibility of the health plan to which that  
            full tax amount was assessed.  


          15)Authorizes DHCS to modify or adjust the methodology, tax  
            amount, taxing tier or other similar provision to the extent  
            necessary to meet the requirements of federal law or  
            regulations, obtain federal approval, or to ensure FFP is  
            available, as specified.  Specifies that any modification or  
            adjustment that would be higher than the following aggregate  
            amounts for the other enrollees and AHCSP enrollees, combined,  
            would be in conflict with this measure: 



             a)   $266,000,000 in the 2016-17 FY;


             b)   $287,000,000 in the 2017-18 FY; and, 


             c)   $309,000,000 in the 2018-19 FY.



          16)Authorizes DHCS to make an adjustment that would result in  
            lowering the amounts in 15) above.  States that nothing would  
            limit the authority of DHCS to make an adjustment that does  
            not impact the amounts in 15) above.









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          17)Requires, if DHCS identifies that a modification or  
            adjustment may be necessary under 15) above, to consult with  
            affected health plans, to the extent practicable, to implement  
            that modification or adjustment.  Requires DHCS to notify  
            affected health plans, and the Legislature within 10 business  
            days of the modification or adjustment.



          18)Requires DHCS to request approval from CMS to implement this  
            bill.  Authorizes DHCS to request a waiver of the broad-based  
            and uniformity requirements, as specified.



          19)Authorizes DHCS to implement the provisions of this bill  
            outside of the administrative rulemaking process and to  
            implement this measure pursuant to provider bulletins, all  
            plan letters, or other similar instructions.  Requires DHCS to  
            notify specified committees of the Legislature within 10  
            business days of such action.


          20)Establishes a the gross premiums tax (GPT) rate of 0% for  
            premiums received for the provision of health insurance on or  
            after July 1, 2016, and on or before June 30, 2019.  Limits  
            the application of this GPT rate to premiums received by an  
            insurer that provides health insurance and has a corporate  
            affiliate, which is either a "health care service plan" or  
            "health plan" that meets the following requirements:


             a)   Is licensed by DMHC or is a MCP;


             b)   Has had at least one enrollee enrolled in the health  
               plan in the base year, as defined, not including  








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               individuals who are enrolled in a Medicare plan, who  
               receive health care services through a health plan pursuant  
               to a subcontract from another health plan or who are  
               enrollees through the Federal Employees Health Benefits Act  
               of 1959, as specified; and,


             c)   Is subject to the MCO provider tax imposed by this bill.  
                 


          21)Defines an insurer that has a corporate affiliate as a health  
            care service plan or health plan as an "insurer that is,  
            directly or indirectly, controlled by, under common control  
            with, or controls a health care service plan".


          22)Prohibits the Insurance Commissioner from considering the  
            reduction of the GPT rate authorized by this bill in any  
            determination to impose or enforce a tax under the relevant  
            retaliatory tax provisions of the Insurance Code and the  
            Revenue and Taxation Code. 


          23)Excludes from the definition of "gross income," under the  
            Corporation Tax (CT) Law, the qualified health care service  
            plan income of a health plan that is subject to the MCO  
            provider tax.  Specifies that the income must properly accrue  
            with respect to enrollment or services that occur on or after  
            July 1, 2016, and on or before June 30, 2019.  Defines a  
            "qualified health care service plan" as a health care service  
            plan that: a) is licensed by DMHC or is a MCP, and, b) subject  
            to the MCO provider tax imposed by this bill.


          24)Defines "qualified health care service plan income" as any of  
            the following revenue associated with the operation of a  
            qualified health care service plan and required to be reported  
            to the DMHC, including the following:








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             a)   Premiums (commercial);
             b)   Copayments, coordination of benefits, and subrogation;


             c)   Title XIX Medicaid;


             d)   Point-of-Service Premiums;


             e)   Risk pool revenue;


             f)   Capitation payments;


             g)   Title XVIII Medicare;


             h)   Fee-for-service (FFS);


             i)   Interest; and,


             j)   Aggregate write-ins for other revenues, including  
               capital gains and other investment income. 


          25)Requires DHCS to submit to the Franchise Tax Board (FTB), no  
            later than December 1, 2016, information regarding every  
            health care service plan that is subject to the tax, as  
            specified.  Requires the information to include the corporate  
            name, address, and calendar period for which each health care  
            service plan is subject to the MCO provider tax.










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          26)Exempts from the minimum franchise tax, a qualified health  
            care service plan with no income other than the excluded  
            qualified health care service plan income.


          27)Authorizes the FTB to prescribe rules, guidelines, or  
            procedures necessary or appropriate to carry out the purposes  
            of the provisions relating to the gross income exclusion for  
            health care service plans.  Exempts the FTB from the  
            administrative rulemaking process.


          28)Provides Legislative intent that the FTB Legal Ruling 2006-01  
            of April 28, 2006 regarding the treatment of apportionment  
            factors attributable to income exempt from taxation shall  
            apply to the apportionment factors attributable to the income  
            of qualified health care service plans excluded by this bill.   



          29)Sunsets this measure on July 1, 2019, and as of June 30,  
            2020, is repealed.   States that any tax and applicable  
            interest and penalties imposed under this bill continues to be  
            due and payable until the tax and any applicable interest and  
            penalties are fully paid.



          30)Provides that this bill's reduction in the GPT rate and gross  
            income exclusion shall become operative on the later of July  
            1, 2016, or the effective date of the federal approval  
            necessary for receipt of federal financial participation in  
            conjunction with the new MCO provider tax.  



          31)Provides that this bill's tax law modifications shall cease  
            to operate on the first day of the first FY beginning on or  
            after:








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             a)   The date the Director of DHCS, in consultation with the  
               Director of the Department of Finance, determines that the  
               taxes have not met their goal of providing funding for  
               health care and prevention, or the state does not have the  
               federal approval necessary for receipt of FFP; or, 



             b)   The effective date of a final judicial determination  
               made by a court of appellate jurisdiction that any of the  
               tax law modifications cannot be implemented.


          EXISTING LAW:  


          1)Establishes the Medi-Cal program, administered by DHCS, under  
            which qualified low-income patients receive health care  
            benefits.  Medi-Cal is California's version of the federal  
            Medicaid program in which funding is provided by both the  
            state and federal government.



          2)Establishes the Knox-Keene Act, the body of law governing  
            health care service plans and enforced by DMHC.



          3)Provides for the regulation of insurers and health insurance  
            agents and brokers by the California Department of Insurance.



          4)Establishes sales and use tax laws which impose sales tax on  
            retailers for the privilege of selling tangible personal  








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            property at retail.



          5)Establishes a sales tax in the amount of 3.9% on MCPs,  
            beginning July 1, 2013 through July 1, 2016, and specifies  
            that these funds be directed to DHCS for purposes of funding  
            managed care rates for health care services for children,  
            seniors, persons with disabilities, and individuals dually  
            eligible for Medicare and Medi-Cal that reflect the cost of  
            services and acuity of the population served.  



          6)Imposes, under the California Constitution, a 2.35% tax on  
            insurers doing business in California, commonly referred to as  
            the "gross premiums tax," and specifies that the GPT is in  
            lieu of all other taxes and licenses, with specified  
            exceptions.  



          7)Imposes, under the CT Law, an annual tax on corporations  
            measured by income sourced to California, unless otherwise  
            exempted.  Generally, for corporations operating both in and  
            outside of the state, income sourced to California is  
            determined on a worldwide basis applying the unitary method of  
            taxation.  The unitary method combines the income of  
            affiliated corporations that are members of a unitary business  
            and apportions the combined income to California based upon  
            either a single sales factor or the average of three factors  
            (the property factor, the payroll factor, and sales factor),  
            whichever is applicable. 


          FISCAL EFFECT:  This bill has not yet been analyzed by a fiscal  
          committee.










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          COMMENTS:  


          1)PURPOSE OF THIS BILL.  According to the sponsor, "This  
            proposed legislation would implement a tax reform proposal to  
            restructure the taxes paid by managed care plans.  This  
            includes a replacement MCO tax for the tax expiring at the end  
              of June 2016 and replaces other taxes currently paid by the  
            health plan industry.  This tax reform proposal provides three  
            years of critical funding for the Medi-Cal program, allowing  
            for the continued expanded health care coverage for millions  
            of Californians and protecting programs from cuts during  
            future budget deficits."


          2)BACKGROUND.  Federal Medicaid law authorizes states to impose  
            health care-related taxes on MCO's without affecting federal  
            matching funding under Medi-Cal.  Health care-related taxes  
            are defined as a licensing fee, assessment, or other mandatory  
            payment that is related to the provision of, or payment for,  
            health care services or items.  In many states, including  
            California, states collect these payments from health care  
            providers to help finance the nonfederal share of their  
            Medicaid expenditures.  To be deemed permissible under federal  
            law, health-care related taxes must be:


             a)   Broad based:  imposed on all providers within a  
               specified class of providers;


             b)   Uniform:  applied at the same rate for all payers of the  
               tax; and,


             c)   No hold harmless:  the state may not provide a direct or  
               indirect guarantee that providers receive their tax payment  
               back, or be "held harmless" from the tax.









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            Federal rules permit some health care-related taxes that do  
            not meet the definition of being "broad-based" and "uniform."   
            To obtain permission for such a tax, states must formally  
            request a waiver of the broad-based and uniform requirements  
            from CMS, and within the waiver request, demonstrate that the  
            tax structure is generally redistributive.  However, federal  
            law does not allow for any waiver of the no-hold-harmless  
            requirement.


          3)CALIFORNIA'S PREVIOUS AND CURRENT MCO TAXES.  Background  
            information provided by the Administration indicates that  
            since 2005, California has used various forms of MCO fees and  
            taxes.  Below are descriptions of these fees/taxes:


             a)   Quality Improvement Fee (2005-2009/10).  Based on  
               federal rules, the quality improvement fee (QIF) was  
               assessed on all premiums paid to legal entities providing  
               health coverage to Medi-Cal enrollees.  When the fee was  
               established, 75% of the revenue generated was matched with  
               federal funds and used for payments to MCO's and the  
               remaining 25% was retained by the state GF.  Effective  
               October 1, 2007, as part of the implementation of the  
               State's new managed care rate methodology, this arrangement  
               changed and 50% of the revenue generated by the QIF was  
               matched with federal funds and used for payments to MCOs  
               and the remaining 50% was retained by the state GF.   
               Changes in federal law resulted in this fee to sunset on  
               October 1, 2009, as it no longer complied with federal  
               requirements.  New federal law required that provider fees  
               be broad based and uniformly imposed throughout a  
               jurisdiction, meaning that they cannot be levied on a  
               subgroup of providers, such as only those enrolled in  
               Medicaid programs.


             b)   Gross Premium Tax level MCO tax (2010-13).  AB 1422  








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               (Bass), Chapter 157, Statutes of 2009, imposed a 2.35% GPT  
               on the total operating revenue of MCPs until July 1, 2011.   
               The proceeds from the tax were be continuously appropriated  
               to:  i) DHCS for purposes of the Medi-Cal program in an  
               amount equal to 38.41% of the proceeds from the tax; and,  
               ii) to the Managed Risk Medical Insurance Board (MRMIB) for  
               purposes of the Healthy Families Program in an amount equal  
               to 61.59% of the proceeds from the tax.  The tax was  
               extended by ABX1 21 (Blumenfield), Chapter 11, Statutes of  
               2011, until July 1, 2012 and updated the sharing  
               percentages for DHCS and MRMIB.  Finally, SB 78 (Budget and  
               Fiscal Review), Chapter 33, Statutes of 2013, extended the  
               sunset date to June 30, 2013.   After the Healthy Families  
               transition to Medi-Cal in 2013, the MRMIB portion was used  
               to offset the GF cost for the Medi-Cal program. 


             c)   Current MCO Tax (2013-June 2016).  SB 78 imposed a  
               3.9375% tax based on the state sales tax rate on sellers of  
               Medi-Cal health services.  The tax was imposed from July 1,  
               2013 through July 1, 2016.  The revenue derived from this  
               sales tax was continuously appropriated to DHCS to be used  
               solely for the purpose of funding managed care rates for  
               health care services for children, seniors and persons with  
               disabilities, and dual eligibles in the Medi-Cal program  
               that reflect the cost of services and acuity of the  
               population served.  In July 2014, CMS issued a guidance  
               indicating that MCO taxes similar to California's were  
               likely no longer permissible for the purposes of funding  
               the Medi-Cal program, and in turn, required states with  
               such taxes to make appropriate modifications.


             d)   Proposed MCO Tax Reform (July 2016-June 2019).  Under  
               the Administration's proposal as codified in this bill, all  
               full-service health plans licensed by the DMHC and/or plans  
               contracted with DHCS to provide services to Medi-Cal  
               beneficiaries, except plans licensed to provide care across  
               international borders and locally operated non-profit  








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               health plans in Sacramento and San Diego, would be subject  
               to the proposed tax. Effective July 1, 2016, a new MCO  
               provider tax would replace the expiring tax, provide an  
               ongoing source of funding for the Medi-Cal program,  
               encourage California's continued successful implementation  
               of the Affordable Care Act, and minimize the need for  
               reductions to the program.  


          4)TIERED TAX STRUCTURE.  In light of CMS' guidance regarding MCO  
            taxes, the Administration proposes to replace the existing MCO  
            tax on MCPs with a broad-based MCO tax that should satisfy  
            federal requirements.  Specifically, the proposal would apply  
            broadly to all managed care plans regulated by DMHC and/or  
            DHCS.  It is projected to raise over    $1 billion each year,  
            generating enough revenue to maintain the current funding for  
            Medi-Cal.  Additionally, the tax structure in this bill would  
            require a waiver of the uniformity requirement since there are  
            difference tax tiers for MCPs, commercial plans and AHCSPs.  


          5)MODIFICATION OR ADJUSTMENT OF TAX.  The Administration's  
            proposal contains language that authorizes DHCS to modify or  
            adjust the tax amount or tax tiers as necessary to meet  
            federal requirements.  However, this modification or  
            adjustment cannot be higher than the following aggregate tax  
            amounts for the other enrollees and AHCSP enrollees, combined,  
            for each of the FYs:  $266 Million (2016-17), $287 Million  
            (2017-18); and, $309 million (2018-19).  If there is any  
            modification or adjustment, DHCS must consult with the  
            affected health plans to implement the modification.  Within  
            10 business days of any adjustment, DHCS must also notify the  
            affected health plans and the Legislature.


          6)CALIFORNIA'S GROSS PREMIUM TAX.  Insurance companies in  
            California are subject to a GPT equal to 2.35% of all premiums  
            written.  The GPT is imposed by Article XIII, Section 28, of  
            the California Constitution.  Section 28(a), in turn, defines  








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            an "insurer" to include "insurance companies or associations  
            and reciprocal or inter-insurance exchanges together with  
            their corporate or other attorneys in fact considered as a  
            single unit, and the State Compensation Insurance Fund."



          For most types of insurers, this tax is in lieu of all other  
            taxes except property taxes and vehicle license fees.  Thus,  
            insurers do not pay tax on other forms of income, such as  
            investment income or income earned from other trades or  
            businesses.  Most other states also have a state-level GPT.  

          The special tax treatment of insurance companies is primarily  
            grounded in the economics of the insurance industry.  Most  
            businesses calculate their income by subtracting costs  
            incurred in the production of a good or service from the  
            revenues received from sales.  Insurance companies, by  
            contrast, collect their revenues "up front," and subsequently  
            make payments to policyholders based on contingent events that  
            may occur months or years later.  Thus, it can be challenging  
            to match up revenues to related expenses.  For this reason, a  
            gross premiums tax was adopted.  As the Legislative Analyst's  
            Office (LAO) has noted:
               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.


            The LAO also notes that the GPT appears, in most years, to  
            raise more revenue than would be raised by applying the CT Law  








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            to insurers' net income.


          7)GPT PROVISIONS OF THIS BILL.  This bill provides that,  
            notwithstanding existing law, the GPT rate for specified  
            insurers shall be 0% for premiums received on or after July 1,  
            2016, and on or before June 30, 2019.  The 0% rate shall  
            specifically apply only to health insurers with a corporate  
            affiliate operating as a "health care service plan" meeting  
            all the following requirements:


             a)   The plan must be licensed by the DMHC or be a managed  
               care plan contracted with DHCS to provide Medi-Cal  
               services;


             b)   The plan must have had at least one enrollee in the  
               health plan in the base year, as specified; and, 



             c)   The plan must be subject to the new MCO provider tax  
               enacted by this bill.  


            Thus, under this bill, health insurers currently subject to  
            the GPT will receive the functional equivalent of a GPT  
            exemption for FYs 2016-17 through 2018-19, provided the  
            insurer has a corporate affiliate operating as a health care  
            service plan subject to the new MCO provider tax.


          8)TEMPORARY "GROSS INCOME" EXCLUSION.  Under California's CT  
            Law, all corporations doing business in California are subject  
            to the income tax or the franchise tax equal to the greater of  
            the minimum franchise tax of $800 or an amount measured by net  
            income attributable to California multiplied by the current  
            tax rate, which is 8.84%.  Multistate or multinational  








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            businesses must apportion their income among the jurisdictions  
            in which they do business.  California may only tax a portion  
            of the income earned by businesses that operate in other  
            states (or nations), in addition to California.  That amount  
            is calculated based on an apportionment formula. 



          Health care plans (including all HMOs and some PPOs) determined  
            not to be subject to the GPT are subject to the CT Law.  As  
            such, a health care provider may be subject to the franchise  
            or income tax as a general "C" corporation.  A health care  
            provider may, however, qualify as an exempt (i.e. charitable)  
            organization and thus be subject to franchise or income tax  
            only on the organization's unrelated business income.  In the  
            case of a "for-profit" health care plan, its "gross income"  
            generally includes all income, from whatever source derived.   
            This bill would exclude from the CT Law the "qualified health  
            care plan income" of a health care plan subject to the MCO  
            provider tax proposed by this bill.  Only the revenue  
            associated with the operation of a qualified health care  
            service plan and required to be reported to the DMHC would  
            qualify for the exclusion.  Examples of qualified revenue  
            include premiums, copayments, capitation payments, FFS and  
            investment income, among others. 

          9)The Franchise Minimum Tax.  A minimum franchise tax of $800 is  
            imposed on all corporations that are incorporated under the  
            laws of California, qualified to transact intrastate business  
            in California, or are doing business in California.    
            Taxpayers must pay the minimum franchise tax only if it is  
            more than their regular franchise tax liability.  



          Existing law provides certain exceptions with respect to  
            imposition of the minimum franchise tax.  For instance, credit  
            unions and nonprofit organizations are not subject to the  
            minimum franchise tax and a corporation is not subject to the  








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            minimum franchise tax for its first taxable year.  However,  
            even though a corporation is not subject to the minimum tax in  
            its first taxable year, it will be subject to franchise tax in  
            its first taxable year based on its taxable income.

          This bill would create an additional exception from the minimum  
            franchise tax for health care service plans with only  
            qualified income, namely income that is excluded from the CT  
            Law under this bill. 

          10)Uncodified Provisions.  This bill contains a number of  
            uncodified provisions chiefly pertaining to the operative  
            dates of this bill's tax law modifications.  For example, this  
            bill contains uncodified language providing that the GPT rate  
            reduction and gross income exclusion shall become operative  
            either on July 1, 2016, or the effective date of federal  
            approval of the new MCO provider tax, whichever is later.



          This bill also contains uncodified language providing that the  
            tax law modifications will automatically sunset on the first  
            day of the FY immediately following:  a) a final appellate  
            court decision finding that the provisions cannot be  
            implemented; or, b) a determination that the tax law  
            modifications have not met their stated goal or have not  
            received federal approval.

          11)RELATED LEGISLATION.  SBX2 15 (Ed Hernandez) is substantially  
            similar to this bill and is currently pending in the Senate  
            Public Health and Developmental Services Committee.



          12)SUPPORT.  Health Net states that it supports a stable funding  
            stream for Medi-Cal to ensure high-quality care to all  
            beneficiaries.  It is confident that the proposal represents a  
            balanced approach that will not negatively affect its  
            purchasers, while generating significant revenue to support  








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            the Medi-Cal program.  Additionally, Health Net points out  
            that this tax reform proposal will have a positive overall  
            aggregate impact on the marketplace and will have, at most, a  
            negligible negative impact on its purchasers.



          The Local Health Plans of California (LHPC) believes DHCS has  
            devised a new MCO tax model that is fair and meets federal  
            requirements.  Under this proposed MCO model, local health  
            plans will continue to pay the tax on their Medi-Cal  
            enrollment, as well as begin paying a tax on their commercial  
            lines of business.  LHPC states that while the local health  
            plans will not benefit from policy reforms because of their  
            non-profit status, they believe that the tax applied to their  
            commercial lines of business is absorbable and supportable -  
            particularly because they recognize it is a critical component  
            to ensuring the continuation of the MCO tax altogether.   
            Finally, LHPC states that if this MCO tax package fails, the  
            Medi-Cal program will lose an estimated $1.1 billion in  
            critical funding and that this loss can neither be absorbed  
            without crisis nor replaced with a source of predictable  
            funding.

          Health Access California, also in support, writes that the MCO  
            tax is an existing tax and this bill proposes to reconfigure  
            the state match, which allows California to draw down $1  
            billion in federal funds that the state would otherwise lose.   
            Another benefit is that the MCO tax is less volatile than the  
            GF because it is based on health plan enrollment.  With the  
            enactment of the Patient Protection and Affordable Care Act  
            and its full implementation in California, health plan  
            enrollment is less subject to economic downturns that the  
            portion of GF revenue derived from capital gains.

          13)NEUTRAL.  Kaiser Permanente states that it has adopted a  
            neutral position on the proposed MCO tax and that after review  
            of this bill, Kaiser is confident that the proposal is a  
            balanced approach that will not negatively affect its  








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            purchasers, while generating important revenue to support the  
            Medi-Cal program.  Kaiser also believes that the proposed MCO  
            tax will have a positive impact on the health care  
            marketplace.  The National Federation of Independent Business,  
            previously opposed, has changed its position to neutral and  
            indicates that its concerns have been alleviated.  The Howard  
            Jarvis Taxpayers Association states that the tax reductions in  
            the MCO proposal represent a far better tax policy.    



          REGISTERED SUPPORT / OPPOSITION:




          Support


          Anthem Blue Cross
          Bay Area Council
          Blue Shield of California
          California Association of Health Plans
          California Chamber of Commerce
          California Chapters of the American College of Physicians
          California Dental Association
          California Health and Wellness
          California Medical Association
          California Orthotic & Prosthetic Association
          California PACE Association
          California Society of Anesthesiologists
          California State Association of Counties
          County Health Executives Association of California
          Health Access California
          Health Net
          Hearing Healthcare Providers California
          L.A. Care Health Plan
          Local Health Plans of California
          Los Angeles Area Chamber of Commerce








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          Molina Healthcare of California
          North Orange County Chamber
          Nurse-Family Partnership
          Rancho Cordova Chamber of Commerce
          Southwest California Legislative Council
          Sutter Health Plan
          Urban Counties of California
          Western Center on Law & Poverty




          Analysis Prepared by:Rosielyn Pulmano/ PH & DS / (916) 319-2097