New Medicaid tax seen as equitable

January 3, 2012
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A new tax to fund the state’s Medicaid program went into effect Sunday, while the old tax continues through March. So, in effect, Michigan’s $12 billion annual Medicaid budget, which provides care for low-income residents, will receive support from two revenue sources through at least the first quarter.

However, a Washington, D.C.-based trade group has filed suit in U.S. District Court for the Eastern District of Michigan against the new tax that levies 1 percent on almost all paid health insurance claims. The Self-Insurance Institute of America claims the tax preempts the Employee Retirement Income Security Act and violates the Supremacy Clause of the U.S. Constitution. SIIA also has asked for an injunction against the implementation and enforcement of the Health Insurance Claims Assessment Act.

The tax would be paid for by insurers that offer fully insured plans, third-party claims administrators and stop-loss insurers of self-funded plans. Medicaid Advantage plans, all Medicare plans and policies that cover federal employees are exempt from the tax. Insurance claims made in Michigan by non-residents also escape the tax, as do claims filed out-of-state by residents. It doesn’t apply to co-pays, coinsurance and deductibles, but it does apply to ERISA groups in Michigan.

The tax is projected to raise $400 million annually, the same figure the old levy, the HMO Use Tax, generated each year.

“I think because our members participate in the Medicaid program, we were very much aware of the need to create or establish an alternate means of financing part of the Medicaid effort. Over the last number of years, there has been a tax that has been applied to Medicaid HMOs, a so-called HMO Use Tax, and we were aware, as the administration was, that the permissibility of that to continue by the federal government was going to expire at some point in the very near future,” said Rick Murdock, executive director of the Michigan Association of Health Plans.

“We needed to have an alternative to replace that revenue,” Murdock said. “Obviously, we represent commercial members as well as Medicaid members, and the question became, where’s the sweet spot — where’s the balance that we need to have for everyone to be comfortable with this? We arrived at a position to support a tax as long as the rate was 1 percent or less.”

The federal government felt the 6 percent HMO Use Tax didn’t spread the burden enough, as it only applied to insurers with a Medicaid contract. Gov. Rick Snyder said having the new tax in place means the state will receive about $800 million each year in federal funding for the state’s Medicaid program, which also provides coverage for seniors in nursing homes.

“The fact that we did not cut Medicaid funding shows that Michigan is committed to protecting our most vulnerable residents. This also brings Michigan in compliance with federal rules,” said Snyder.

The new law grew from Senate Bills 347 and 348 sponsored by State Sen. Roger Kahn, a physician and Republican from Saginaw Township. “As a doctor, I understand how vital Medicaid is for the millions of Michigan residents who depend on it for their health care,” said Kahn, who also introduced a pair of bills he felt would stop Medicaid fraud. Both are in a Senate committee.

“Failure to pass the claims tax would have meant devastating cuts to Medicaid,” said Eric Schneidewind, president of AARP Michigan.

“Used as a state match, it generates another $800 million in federal dollars, and that’s real money for providers, hospitals, pharmacies and others that receive Medicaid payments,” said Murdock.

The law allows insurers to pass the cost of the tax on to individual and group-plan subscribers without getting permission from the state’s insurance commission. How much premiums will rise isn’t certain because the cost of a 1 percent tax is likely to be more than 1 percent.

“Most of the carriers will pass that on, at least initially, because it wasn’t factored into a lot of the negotiations that went on over the last year. Over time, I don’t know if that will be a negotiated item or not,” said Murdock.

The tax carries a $10,000 annual limit for each individual covered.

As for the lawsuit, SIIA told Snyder late last summer that it would sue if the legislation became law. The suit names Snyder, Treasurer Andy Dillon and R. Kevin Clinton, who directs the state’s insurance office. SIIA sponsors and administers self-funded ERISA plans, which the group alleges the state’s tax preempts. Maine, Massachusetts and New York have similar taxes, and SIIA hasn’t challenged those.

“So the courts are going to have to deal with this and hopefully fairly quickly. We believe from the research that we’ve done that the paid-claims approach is a method that should ultimately be proven legal in terms of its approach,” said Murdock. “If it’s not, then we have a major budget issue at the state.”

The HMO Use Tax expires March 31. It was left in place until then to get a better handle on how much revenue the new tax would generate.

Besides AARP and MAHP, the Michigan State Medical Society and the Michigan Health and Hospital Association supported the tax. The state Department of Community Health reported nearly 20 percent of the state’s population — about 1.9 million people — is covered by Medicaid.

“It’s estimated there are roughly $60 billion in paid claims that, I guess, would be exposed to this tax,” said Murdock.

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