The newly enacted state budget imposes a multibillion-dollar tax on health insurance without specifying who must pay how much – leaving those basic details to be decided later by the health commissioner in negotiation with federal officials.

This unusual approach makes it impossible to judge whether the so-called MCO tax will turn out to be a risky fiscal gimmick, an added burden on consumers or a combination of both.

Supporters have said the tax on managed care organizations, or MCOs, will primarily target plans doing business with Medicaid – as a strategy to “unlock” additional federal aid – and have little or no impact on commercial insurers and their customers.

However, the remarkably vague budget provision, which is just 224 words long, includes no mention of safeguarding average consumers. As written, it would authorize a tax of any amount on all health insurers, which could lead to higher premiums in the longer term.

Advocates of the MCO tax were inspired by California, which last year adopted an MCO tax that generates more than $4 billion a year by gaming Medicaid’s financing system, under which the federal government pays half or more of a state’s Medicaid expenses.

California’s tax charges $182.50 per month rates for a portion of Medicaid enrollees and a just $1.75 per month for other customers. When Medicaid reimburses plans for this expense, the state and federal government split the cost. The state’s share is a wash, and the federal portion becomes revenue to balance California’s budget. In effect, California is taxing the federal government.

Federal law tries to prevent such maneuvers by requiring health-related taxes to be “broad-based” and “uniform.” California sidestepped those standards by fine-tuning the details of its levy to satisfy a statistical test embedded in regulations established by the Centers for Medicare & Medicaid Services.

In December, CMS officials warned that they would be closing that loophole – but temporarily approved California’s tax through 2026.

In mid-March, legislative leaders in Albany proposed for New York to exploit the same loophole before it goes away, aiming to raise $4 billion per year. Unable to resolve the details in the closing weeks of budget negotiations, Hochul and the Legislature agreed to turn the job over to the state health commissioner, Dr. James McDonald, in remarkably open-ended terms.

Here is the full text of the budget language authorizing the tax (Part II of A. 8807-c/S. 8307-c):

1. The commissioner, subject to the approval of the director of the budget, shall: apply for a waiver or waivers of the broad-based and uniformity requirements related to the establishment of a New York  managed care organization provider tax (the “MCO provider tax”) in order to secure federal financial participation for the costs of the medical assistance program; issue regulations to implement the MCO provider tax; and, subject to approval by the Centers for Medicare and Medicaid Services, impose the MCO provider tax as an assessment upon insurers, health maintenance organizations, and managed care organizations offering the following plans or products.

(a) Medical assistance program coverage provided by managed care providers pursuant to section three hundred sixty-four-j of the social services law;

(b) A child health insurance plan certified pursuant to section twenty-five hundred eleven of this chapter;

(c)  Essential Plan coverage certified pursuant to section three hundred sixty-nine-gg of the social services law;

(d) Coverage purchased on the New York insurance exchange established pursuant to section two hundred sixty-eight-b of this chapter; or

(e)  Any other comprehensive coverage subject to articles thirty-two, forty-two and forty-three of the insurance law, or article forty-four of this chapter.

 2. The MCO provider tax shall comply with all relevant provisions of federal laws, rules and regulations.

The provision calls for the commissioner to apply for a waiver of CMS rules to “secure federal financial participation,” but does not explicitly mandate a California-style tax that effectively puts the entire burden on the federal government.

Nor does it prohibit future changes, raising the possibility that the tax could be reconfigured at any time.

Another blank spot is how the money will be spent. Separate budget language on that point says the MCO tax revenue should go into a newly created Healthcare Stability Fund, which can be used either to increase spending on Medicaid or to replace existing spending on the program, which would effectively free money up to be spent elsewhere.

The lack of specifics raises a concern for New York taxpayers.

Although the expected windfall of federal aid can be expected to last only two or three years, officials have said they hope to use it to finance rate increases for hospitals, nursing homes and other health-care providers, which normally continue indefinitely.

This use of short-term funding for long-term expenses would create the likelihood of a fiscal cliff in a few years’ time, when CMS closes its loophole and extra federal aid dries up. 

At that point, officials will be tempted to reconfigure the MCO tax to apply more broadly to the entire health insurance industry, adding to the already high burden of health insurance taxes in New York.

The MCO tax as currently written would appear to authorize the health commissioner to make that billion-dollar change without further action by the Legislature – which is an unhealthy degree of power to grant to an unelected official, and a lingering threat for taxpayers.