The Hochul administration has requested federal approval for a multibillion-dollar “MCO tax” on health plans without announcing the move or providing details to the public.

As vaguely authorized by lawmakers this spring, the tax on managed care organizations, or MCOs, is expected to primarily target Medicaid in a gambit to extract federal matching aid. However, commercial health plans and their customers will have to contribute at least some portion, and that amount remains unclear.

Last month, the Health Department submitted a plan for the tax to the Centers for Medicare & Medicaid Services, or CMS. The plan spells out which MCOs would be targeted, what rates they would pay and how much money the tax would raise – specifics that the Legislature left to be determined by Health Commissioner James McDonald in negotiation with Washington officials.

Also uncertain is when the tax will take effect. Under federal rules, it could be applied retroactively as early as July 1.

When the Empire Center requested a copy of the document, the Health Department spokeswoman replied that “the MCO Provider Tax Plan is not publicly available at this time.”

The center followed up by submitting a formal request under the Freedom of Information Law – and urged the department to release the document immediately:

The requested records concern a tax that will (a) apply to the health plans covering many if not most New York residents, (b) generate billions of dollars in revenue to the state and (c) could take effect retroactively to July 1, 2024. Under the circumstances, the Department should release the records without delay.

New York’s proposal was inspired by a similar move 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.

As enacted last year, California’s tax charges $182.50 per month rates for a portion of Medicaid enrollees and just $1.75 per month for other customers. When Medicaid reimburses plans for this expense, the state and federal governments 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. (A proposal on California’s ballot this November would modify the tax by making it permanent and reallocating more of its revenue to new Medicaid spending.)

Federal law tries to prevent maneuvers of this type 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 CMS.

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

Albany’s MCO tax is an attempt to exploit the same loophole before it goes away, in hopes of raising as much as $4 billion per year. 

However, crucial details will have to be altered to fit New York’s health insurance infrastructure, leaving many unknowns.

• How much will the commercial rate add to the already high burden of state taxes on health insurance, which add hundreds of dollars to the typical family’s annual premium?
• How will the MCO tax affect New York’s fragile markets for non-group and small group plans, where premiums have soared far above national averages?
• How much revenue will the tax generate and how will it be spent?
• Most importantly, what happens after 2026 if, as promised, federal officials close the loophole that makes the MCO tax so lucrative? Will Albany lawmakers repeal the tax and forfeit billions in revenue, or will they be tempted to keep it in place – even if that means a heavier burden for commercial customers?

These questions should have been addressed before Governor Hochul and the Legislature moved ahead with the MCO tax. Keeping the answers secret now is unacceptable.

UPDATE: Budget Director Blake Washington was asked about the MCO tax during an interview on WCNY’s Capitol Pressroom.

He said “formal correspondence [about the tax] was shared with CMS a handful of weeks ago.” 

Regarding the timing of implementation, Washington said: “We’re hoping that we can realize the revenue by the end of this calendar year, but no later than the beginning of next fiscal year.”