Legislative leaders are proposing an additional $4 billion tax on health insurance plans in the upcoming state budget – but withholding specifics of how it would work.

The concept emerged Tuesday in the Assembly’s draft of the state budget for fiscal 2025, which is due by the end of this month.

The health-care portions of the Assembly’s so-called one-house budget called for raising $4 billion from a “tax on managed care organizations” – and using the money to increase Medicaid spending – but said nothing about how the tax would be collected.

[The Senate did not specifically mention the proposal in its one-house budget, but Senate Finance Chairwoman Liz Krueger expressed support, calling it “an easy answer of how we pay for [undoing] the Medicaid cuts without it impacting other parts of the budget.”]

UPDATE: The Senate budget resolution called for the Department of Health

to submit a federal waiver to impose a per member per month tax on all managed care companies, with higher rates imposed on Medicaid Managed Care plans compared to non-Medicaid plans. This tax is expected to yield approximately $4 billion in additional federal financial participation per year for three years.

The lack of detail raises concern that legislative leaders intend to negotiate the plan in private talks with Governor Hochul and keep specifics secret until just before lawmakers vote on the final budget.

Such a tax could theoretically be designed to generate federal matching funds through Medicaid while imposing only nominal costs on health plans and consumers. Without details, however, the risks and benefits are impossible to judge.

Insiders said the idea for an MCO tax was floated by the Greater New York Hospital Association, mirroring a similar levy recently enacted in California.

The GNYHA plan reportedly calls for health plans to pay $40.40 per month for each of their Medicaid enrollees, and $1 per month for each non-Medicaid enrollee.

MCO taxes and other so-called provider taxes are a widely used strategy to exploit Medicaid's open-ended funding system, in which the federal government pays a fixed percentage of each state's costs. In New York, each dollar spent on Medicaid out of state funds is roughly matched by another dollar from Washington.

Thus, if the state were to raise $4 billion from managed care plans, it could use that money to finance an $8 billion increase in premiums paid to the plans on behalf of Medicaid enrollees – with the federal government picking up half the cost. This would leave the MCOs with a net increase of $4 billion, which they would pass along in the form of higher fees for hospitals and other providers.

This strategy is widely considered to be an abuse, and the federal Centers for Medicare & Medicaid Services has tried to restrict the practice by requiring that taxes used to finance Medicaid must be "broad-based" and "uniform" – that is, not disproportionately targeted to Medicaid-related spending. However, almost every state uses at least one provider tax, and at least 18 have MCO taxes.

New York currently imposes two taxes of this type under its Health Care Reform Act: a surcharge on hospital services of 9.63 percent for commercial patients and 7.04 percent for Medicaid patients, and a per-enrollee "covered lives assessment" that varies by region, from $10.25 per year in the Utica-Watertown area to a high of $189 in New York City. These taxes raise about $5.7 billion a year, most of which flows into the Medicaid budget.

Last year, California enacted an MCO tax that was meant to raise $19.5 billion over four years. In its first year, it charged the affected plans $182.50 per month for Medicaid enrollees and only $1.75 per month for non-Medicaid enrollees. Although it was clearly targeted, CMS granted its approval because the plan narrowly passed a statistical test showing a lack of correlation between amounts owed and Medicaid payments.

In a side letter to state officials, however, CMS said it believed the California tax violated the spirit of its regulations and that the agency intended to update its statistical test – signaling that it would reject similar taxes in the future.

This raises the possibility that an MCO tax enacted by New York this year would be rejected in Washington – or that it would be okayed on a temporary basis, leaving a multi-billion-dollar hole in the Medicaid budget when that approval expires. If that were to happen, legislators would likely feel pressure to impose the tax equally on non-Medicaid enrollees, adding to the already high cost of health insurance in New York. 

If New York enacts the proposed MCO tax, the Legislature intends to use the revenue to fuel a further increase in Medicaid spending, which has been rising at double-digit rates in the aftermath of the pandemic. 

While Hochul has proposed trimming state Medicaid spending by $700 million, the Senate is proposing a year-to-year increase of $2.8 billion, and the Assembly is proposing an increase of $4.3 billion (see table and chart).

New York's per capita Medicaid spending is already the highest of any state's and 72 percent above the national average.