While some states were already building the tax into the rates they pay Medicaid plans, others were not. They said that without guidance from the CMS or Internal Revenue Service, they were unsure if they had to. The tax is expected to raise $8 billion in 2014 alone. Most not-for-profit Medicaid plans are exempt from the tax.
The levy will add $36 billion to $39 billion over 10 years to the national cost of Medicaid, according to the report by the actuarial firm Milliman paid for by Medicaid Health Plans of America. That's a small fraction of the total federal and state cost of Medicaid, which was $421 billion in 2012. It will help pay for the Medicaid expansion to millions of adults with incomes up to 138% of the federal poverty level in those states that have accepted the Medicaid expansion.
For months, Medicaid Health Plans of America has argued that states were obligated to consider the tax in setting rates, since federal law dictates that the states pay actuarially sound rates.
On Tuesday the CMS agreed with plans, laying out its guidance in a frequently asked question document (PDF) on the matter. “This fee is not unlike other taxes and fees that actuaries regularly reflect in developing capitation rates as part of the nonbenefit portion of the rate,” the notice says. “CMS believes that the health insurance providers fee is therefore a reasonable business cost to health plans that is appropriate for consideration as part of the nonbenefit component of the rate, just as are other taxes and fees.”
The CMS will allow states to pay plans retroactively for the tax once it's clear exactly how much the plans had to pay for the tax. Ultimately, the agency anticipates that states will move to a prospective calculation as they and the plans gain more experience with the tax.
The CMS said that states choosing to retroactively reimburse health plans for the tax should establish a time frame for payment, typically between 30 to 90 days, after receipt and review of the health plan's assessment from the IRS.
Jeff Myers, CEO of Medicaid Health Plans of America, said his group was pleased by the CMS guidance and that it pushed states to make timely payments.
Last year, America's Health Insurance Plans expressed “deep concern” that the tax would put pressure on state Medicaid budgets if states had to incorporate the tax into their rates. AHIP cited this as one of the reasons the tax should be repealed.
The Center for Budget and Policy Priorities, a liberal think tank, disagreed. “Managed care accounts for only about 20% of Medicaid spending, and about one-fifth of the Medicaid beneficiaries enrolled in managed care are enrolled in a plan that isn't subject to the tax,” senior fellow Paul Van de Water wrote in a blog post.
He added that states will likely be tough negotiators and are unlikely to allow Medicaid managed-care plans to pass through the entire amount.