BILL ANALYSIS Ó
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Date of Hearing: February 10, 2016
ASSEMBLY COMMITTEE ON PUBLIC HEALTH AND DEVELOPMENTAL SERVICES
Rob Bonta, Chair
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(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