The Hochul administration’s proposed “MCO tax” would generate far less than the $4 billion in extra federal aid anticipated by state lawmakers when they approved the concept this spring, according to documents obtained by the Empire Center.

The state’s Sept. 4 waiver application to the federal government – obtained Monday by the Empire Center under the Freedom of Information Law – lay out a complex tax plan that would bring in gross revenues of $2.8 billion per year starting on Jan. 1.

A tax of that size would likely result in net proceeds of $1.4 billion to $1.8 billion after the state’s costs are deducted.

Inspired by a similar scheme in California, the tax on managed care organizations, or MCOs, is designed to exploit the system for financing Medicaid – the government-run health plan for the low-income and disabled – under which the federal government pays half or more of a state’s Medicaid expenses.

As such, New York’s proposal would primarily target MCOs serving Medicaid enrollees. Those plans would pay rates ranging from $25 to $126 per member per month, depending on their size, generating a total $2.7 billion annually, according to the application.

Those amounts would be reimbursed by Medicaid, with the state and federal governments splitting the cost. The state would pay itself back out of the tax proceeds – and keep the federal matching aid for itself. In effect, the state would be taxing the federal government.

In the same vein, the application indicates the tax would charge $7 to $13 per member per month to MCOs in New York’s Essential Plan, which is almost entirely funded by Washington, generating $76 million in extra aid.

To pass muster under federal regulations, the tax would also apply to fully insured commercial health plans, albeit at lower rates. These plans would pay $1.50 to $2 per month, or $18 to $24 per year, for each of their 4.1 million enrollees, raising about $100 million, the state’s plan said. That amount would come out of the pockets of the plans and their customers, with no state or federal reimbursement.

The proposed tax would not apply to Medicare health plans or to “self-insured” health plans, which are commonly used by large employers and which are exempt from most state regulations by federal law. 

Federal officials have tried to prevent states from exploiting Medicaid in this way by requiring health-related taxes to be “broad-based” and “uniform.” Last year, however, California officials found a way to sidestep those standards by fine-tuning the details of its MCO tax to pass a statistical test embedded in regulations established by the Centers for Medicare & Medicaid Services, or CMS.

Like New York’s proposal, California’s tax charged far higher rates for Medicaid enrollees than commercial customers.

In December of last year, CMS officials temporarily approved California’s tax through 2026, but warned that they would be tightening their regulations to prevent such schemes after that.

Despite that warning, New York lawmakers voted this spring to seek a deal similar to California’s, even if it were only temporary. During budget negotiations, Assembly and Senate leaders estimated an MCO tax would “unlock” as much as $4 billion in extra federal aid, which they promised to spend on health-related programs.

However, lawmakers left the details to be worked out by the Health Department in negotiations with CMS – and that process ended with the Health Department submitting its smaller-scale tax plan on Sept. 4.

Lawmakers did not specify how this potentially short-lived source of revenue would be spent. Instead, they directed proceeds from the tax into a newly created Healthcare Stability Fund. As currently authorized, money in the fund 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