Health Plans’ Finances A Big Unknown In California Tax Swap Package

A $2.4 billion managed-care organization tax package awaiting votes in the California Legislature reflects the heavy imprint of the state’s health insurance industry, which pushed for major changes to avoid any tax hit that could be passed on to customers.

The approach has earned the backing of the California Chamber of Commerce and neutrality from the influential Howard Jarvis Taxpayers Association. It has a strong chance of winning enough support from Republican lawmakers to reach the needed two-thirds vote threshold to pass. Then, the state would be on the verge of its ultimate goal: continuing to pull in more than $1 billion in federal matching money.

State policymakers normally have detailed knowledge about how government programs receive and spend money. Yet the current package, hammered out in weeks of private talks between the Brown administration and health plan representatives, rests on a major unknown: How each plan would fare after the “tax reforms,” or offsets.

Health plans have crunched their numbers, but most of the information is proprietary and not available to the Brown administration or the statewide trade group that helped lead negotiations on the proposal. The extent to which any plan could come out ahead or behind under the three-year proposal is unknown.

“It’s certainly not a pretty process,” said Anthony Wright, executive director of Health Access, a group that advocates for affordable health care. The importance of maintaining the flow of matching federal dollars justifies the approach, he added.

“It would be very bad for the industry as a whole if we lost a billion dollars for the health care system,” Wright said.

Renewed in 2013, California’s tax on managed-care organizations expires July 1. It applies to about two dozen health plans with Medi-Cal managed-care patients.

In July 2014, though, the Obama administration said any renewed tax needed to apply to all health plans. Gov. Jerry Brown released such a proposal in January 2015, and publicly available information collected by the state made clear each plan’s potential tax hit.

Republican lawmakers, as well as many health plans, quickly came out against the idea. They warned that the expanded tax would drive some insurance carriers to leave the California market while raising rates for millions of people with commercial coverage.

The current legislation seeks to address those concerns. It hinges on giving some plans a break on two other taxes: reducing their gross premium tax rate and exempting them from the corporation tax. Officials have overall estimates of those offsets, but not plan-by-plan details.

Health insurance is closely regulated by the state and the subject of multiple bills annually. In 2015, health plans overseen by the Department of Managed Health Care and the industry’s trade group spent almost $7 million on lobbying, records show. They gave $34 million to state campaign committees during the last election cycle.

The California Association of Health Plans announced its support for the tax-swap legislation earlier this month.

Charles Bacchi, the group’s CEO, downplayed prospects that any plan could receive a large tax windfall or face an unexpectedly high tax bill that could be passed on to their customers.

“What we know is we’ve been in constant communication about this proposal and the modeling and the tax relief. What they are telling us is the proposal is affordable,” Bacchi said of his members. “But it really depends on (a plan’s) tax filing.”

Department of Finance spokesman H.D. Palmer said officials will be able to tell after a few years if the swap is working as intended. If necessary, lawmakers could retool it as part of any renewal, he said.

The current bill also includes some plan-specific language. Kaiser Foundation Health Plan, which faced a major tax hit under last year’s proposal, is a nonprofit and would largely miss out on the proposed tax offsets. The latest bill would create a less-costly tax tier for Kaiser, the state’s largest health plan.

“We appreciate the efforts of the administration and Legislature to ensure this proposal won’t impede our ability to provide high-quality, affordable health care to all,” Kaiser spokeswoman Amy Thoma said in a statement. The foundation is neutral on the bill.

The National Federation of Independent Businesses last week dropped its opposition to the proposal and took a neutral stance. The swap leaves “no valid rationale for health plans to raise rates due to this legislation,” it wrote.

The Republican-friendly Howard Jarvis group announced its neutrality Thursday.

In a letter to Republican lawmakers’ offices, the group wrote that “no one outside of the insurers” knows how the estimated $100 million in overall industry savings from the swap will be divvied up.

But it added, “there is no concrete evidence that any costs that may result” will be passed on.