April 9, 2019

Rules May Complicate Pritzker Plan to Tax MCOs

Cover of Illinois FY 2020 budget proposal, with photo looking up into capitol doneGov. Pritzker’s budget proposal delivered last month calls for new taxes on cigarettes and insurance companies to fund Medicaid. Here is some context on where it came from and the challenges it faces.

The Department of Healthcare and Family Services operating budget of $25.1 billion is about $900 million more than for the current year. The vast majority of it is earmarked for Medicaid. The program, which covers 1 in 4 Illinois residents, accounts for close to a third of total state spending.

But if things go according to the new administration’s plans, the cost to Illinois taxpayers would actually be about $700 million less than this year because the new taxes would bring in more federal matching funds, reducing the appropriations from general revenue.

The proposed cigarette tax is projected to generate $55 million. But the largest chunk of new revenue, $390 million, would come from a new assessment on Medicaid managed care organizations, or MCOs – the six insurers that, among them, cover all Medicaid beneficiaries in the state.

Raising money from the Medicaid MCOs would trigger a larger federal matching share, part of which could then be channeled back to the insurers to abate the cost of the assessment. This mirrors the mechanism that has helped fund Medicaid in Illinois through hospital assessments, which account for more than half of the Medicaid funding hospitals receive.

State Rep. Greg Harris, who sponsored the budget bill (actually a package of 78 pieces of legislation), has been working on this idea for several years. Illinois receives the lowest amount of federal funding per Medicaid beneficiary of any state, and advocates have long viewed this kind of tax as an untapped resource. To offset the opposition of insurers, they have pointed out that a portion of the proceeds could be funneled back, as is the case with hospitals.

The idea of taxing health insurers is not new. An annual fee charged to insurance companies on health policy premiums was included in the Affordable Care Act. This health insurance tax, or “HIT” as it was dubbed by insurers, was strongly opposed by the insurance industry, which argued that it results in higher premiums and exacerbates instability in the insurance market. Congress in 2015 passed a one-year moratorium that has been extended to the present.

A similar charge has been made against the Illinois proposal. Tax experts told NPR Illinois that there is no way to tax MCOs without taxing all health insurers, which will just get passed on to consumers. Other states have implemented taxes exclusively on Medicaid MCOs but faced pushback from the federal government. An OIG report discusses how states moved into compliance by expanding the tax to all MCOs. In 2016, Ohio and Michigan were taxing Medicaid MCOs only. The Centers for Medicare and Medicaid Services issued a waiver to Ohio in 2017 to bring the state into compliance with the federal requirements that taxes be broad-based. Illinois will need to tailor its proposal to make sure it complies with those federal requirements. This is not the only hurdle the concept faces.

Bringing the insurers on board with an insurer-specific tax means that they will need to be able to recoup at least part of the fees.

Moreover, there has been growing frustration with the results of managed care. Sen. Heather Steans, who chairs the Senate appropriations committee, had pushed for shifting to a managed-care model, which Illinois began to move to in 2011, as a way to achieve care coordination, better outcomes and greater cost-efficiency in service delivery. But she now says it isn’t working as planned, and that the MCOs have actually been controlling costs by denying claims. As one hospital CEO told NPR Illinois, denials, which in the pre-managed care days were around 4%, are now 25%.

Last month, Sen. Steans introduced legislation ( SB 1697 ) which would require insurers to standardize medical-necessity documentation and service authorization in order to curb unwarranted denials. Another recent bill sponsored by the senator ( SB 2021 ) seeks to regulate the way in which the program handles redeterminations of eligibility, an issue of sharp concern in recent years. HealthChoice Illinois, the state’s Medicaid managed care enrollment system, has also faced criticism for issues of lagging updates of provider data.

If fiscal matters go as planned for Illinois’ Medicaid program, there will be money to invest in correcting these issues, provided a proposal goes forth that satisfies both the revenue needs of the state and federal requirements.

(The soaring image of the state capitol is from the cover of the FY2020 budget proposal)


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