State Medicaid rates must factor in Obamacare tax

States will have to pay Medicaid managed-care plans higher rates to cover the cost of the Obamacare health insurance tax, the CMS said last week.

The tax is expected to raise nearly $100 billion over 10 years from all insurers to help fund coverage expansion under the Patient Protection and Affordable Care Act. Insurers have argued that states should cover the cost of the tax, while some state officials have complained about the financial burden. But other observers say the new federal dollars flowing to states that accept the ACA's Medicaid expansion more than offset the cost of the tax.

The federal government itself will pay the majority of the tax since it pays over half of the cost of state Medicaid programs.

Some states had held off on building the tax into the rates they pay Medicaid plans, saying that without federal guidance 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 up to $39 billion over 10 years to the national cost of Medicaid, according to a report by 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 Medicaid expansion to millions of adults with incomes up to 138% of the federal poverty level in states that accept the expansion.

The Medicaid Health Plans of America argued that states were obligated to consider the tax in setting rates, since federal law dictates that the states pay actuarially sound rates.

Last week, the CMS issued a guidance agreeing with the insurance group. “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,” according to the notice. “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 states should establish a time frame for payment, typically between 30 to 90 days.

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