Will Washington save Californians from Sacramento’s MCO tax scheme?

There’s more than one way to defeat a tax increase.

On Monday, California Assembly Republicans led by Carl DeMaio, R-San Diego, sent a letter to federal officials and urged them to “deny federal approval of California’s recently enacted Managed Care Organization (MCO) tax proposal.”

The MCO tax is a species of revenue-raisers that ordinary people experience as higher health insurance costs. The tax is levied on health insurance plans on a per-enrollee basis. In the recent past it has been imposed at a different rate on government-paid health insurance, specifically Medicaid, than on private commercial insurance plans.

This year, for example, the MCO tax is $2.25 per enrollee, per month, if the enrollee has private insurance. If the enrollee is on Medi-Cal, the per-enrollee monthly tax is $192.50.

California’s idea was to stick it to the feds by raising the federally reimbursable cost of Medicaid with a very high per-enrollee tax, while giving commercial insurance plans a break.

The federal government called this out as a rip-off of federal taxpayers, demanding that provider taxes be made uniform if states expected federal reimbursement for the Medicaid costs that were padded by those taxes.

So California’s latest version of the MCO tax hits all health insurance plans – Medicaid, commercial and Affordable Care Act Marketplace – with a per-enrollee tax of $8.85 per month. Because the tax is passed through to consumers, a typical family will pay an additional $425 per year for health insurance.

Where does the tax money go? That is the subject of a years-long argument. If it was a 1950s horror movie, the title might be Screaming Healthcare Providers vs. Giant Budget Sinkhole.

The MCO tax was first enacted in 2005 and extended multiple times. In 2024, the “Screaming Healthcare Providers” side placed Proposition 35 on the statewide ballot to make the MCO tax permanent and allocate the revenue to the Medi-Cal program, healthcare workforce initiatives, subsidies for drug prices and a limited amount to the general fund to offset Medi-Cal funding. Proposition 35 passed with an overwhelming 68% of the vote.

In their letter on Monday, the Assembly Republicans informed Health and Human Services Secretary Robert F. Kennedy, Jr., and Dr. Mehmet Oz, administrator of the Centers for Medicare & Medicaid Services, that this year’s version of the MCO tax “raises serious legal and policy concerns” related to Proposition 35. “By using the tax to generate significant General Fund relief and offset broader Medi-Cal budget pressures, the enacted proposal appears to depart from the purpose presented to voters.”

Healthcare provider taxes need federal approval in order to draw down federal matching funds. DeMaio and the other Assembly members urged Kennedy and Oz to refuse to approve California’s MCO tax. “Federal approval of this proposal would effectively reward Sacramento’s failure to control Medi-Cal spending and create a precedent whereby states can rely on increasingly aggressive provider tax structures to paper over budget deficits,” they wrote.

Another thing that California has done in an increasingly aggressive manner is expand the number of people on Medi-Cal without much caring whether there were enough doctors willing to accept Medi-Cal reimbursement rates, which can be below the cost of providing the care. No wonder healthcare providers have been screaming.

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Contributing to the problem is the state’s reckless decision to provide all income-qualified undocumented immigrants with full-scope Medi-Cal health insurance, another half-baked idea enacted into California law in flat defiance of basic arithmetic. The annual cost to state taxpayers – federal tax money is not available to provide health insurance to people with “unsatisfactory immigration status” – is about $12 billion per year. This year, the governor closed the program to new enrollees to try to limit the financial damage. 

It’s popular to shout that “healthcare is a human right.” Popular, but wrong. Healthcare is a service. Somebody has to provide it, and somebody has to pay for it.

Politicians who lie about that should be voted out of office.

Write [email protected] and follow her on X @Susan_Shelley

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