California Enacts Restructured Managed Care Organization Provider Tax

by Saleem A. Shareef

On June 29, 2023, California Governor Gavin Newsom signed legislation that restructures the Managed Care Organization (MCO) Provider Tax. New tax amounts are based on restructured taxing tiers. (L. 2023, A119 (c. 13), effective 06/29/2023.)

MCO provider tax prior to January 1, 2023.

The tax was originally enacted in 2005 and has since been extended several times. The most recent tax was effective January 1, 2020 through December 31, 2022. The tax was imposed on health plans for fiscal years 2019-2020, 2020-2021, 2021-2022, and the first six months of 2022-2023 (i.e., July 1, 2022 through December 31, 2022). Generally, the purpose of the tax is to enable the state to use the revenue from the tax to draw down federal matching funds to support the state’s Medi-Cal program freeing up revenues in the state’s General Fund.

Restructured tax.

Effective date and tax periods: The newly enacted tax is effective and operative on April 1, 2023, or the effective date, certified in writing by the Director of Health Care Services, of the federal approval necessary for receipt of federal financial participation, whichever occurs later. The tax is imposed for the following tax periods: April 1, 2023 through December 31, 2023 and calendar years 2024, 2025, and 2026.

Tax amounts: The tax amounts are based on restructured taxing tiers as either a Medi-Cal taxing tier or Other taxing tier (i.e., “Other” refers to individual enrollees who are not Medi-Cal beneficiaries). Tier I for either consists of countable enrollees in a health plan from zero up to and including 1.25 million; tier II, greater than 1.25 million up to and including 4 million; and tier III, greater than 4 million. “Countable enrollee” means an individual enrolled in a health plan during a month of the base year, which is the period from January 1, 2022 through December 31, 2022. The per enrollee tax amount is $0 for Medi-Cal or Other taxing tiers I and III for all tax periods. For the tax periods April 1, 2023 through December 31, 2023 and calendar year 2024, the Medi-Cal per enrollee tax for tier II is $182.50, and the Other per enrollee tax for tier II is $1.75. For calendar year 2025, the Medi-Cal per enrollee tax for tier II is $187.50, and the Other per enrollee tax for tier II is $2. For calendar year 2026, the Medi-Cal per enrollee tax for tier II is $192.50, and the Other per enrollee tax for tier II is $2.25.

Collection and payment: The State Department of Health Care Services collects the tax for each health plan (i.e., a health care service plan, other than one that provides only specialized or discount services, that is licensed by the Department of Managed Health Care or a managed care plan contracted with the State Department of Health Care Services to provide full-scope Medi-Cal services) in quarterly installments and determines the amount due for each installment in the applicable tax period by dividing the total tax for a tax period by the number of calendar quarters in the respective tax period. However, the State Department of Health Care Services cannot collect the tax until it receives approval from the federal Centers for Medicare and Medicaid Services that the tax is a permissible health care-related tax and is eligible for federal financial participation. Within 30 business days following receipt of all necessary federal approvals, the State Department of Health Care Services must send a notice to each health plan subject to the tax stating the tax due for each tax period and the dates on which the installment payments are due for each tax period. The first tax payment is due no earlier than 20 calendar days following the date the State Department of Health Care Services sends the notice.