Q&A: Everything you need to know about the healthcare plans tax the Legislature just passed

Gov. Jerry Brown speaks at the Capitol on Jan. 7.

Gov. Jerry Brown speaks at the Capitol on Jan. 7.

(Rich Pedroncelli / Associated Press)

Culminating a prolonged, wonky debate that has consumed the Capitol for months, legislators on Monday approved a new tax on healthcare plans that would help finance the state’s public healthcare program for the poor.

The package of bills — which await Gov. Jerry Brown’s signature — would overhaul a tax on managed care organizations (MCOs), in an effort to secure more than $1 billion in federal money to help pay for Medi-Cal, which serves a third of the state’s population.

“I can’t emphasize enough the importance of the MCO financing proposal here before us today,” Assemblyman Rob Bonta (D-Alameda) said on the floor.

“We cannot risk losing this much-needed federal funding,” Bonta added. “We need to continue funding the expansion of healthcare coverage and protect programs from cuts during future budget deficits. Today’s proposal will allow us to do both.”

The new tax required bipartisan votes to clear the two-thirds vote threshold. Some normally tax-averse Republicans said they were supportive of the plan in part because it eliminated certain levies for health insurers, reducing the companies’ overall tax burdens. GOP lawmakers also were swayed by companion spending measures that increased money for services for the developmentally disabled and paid down state debts.

“Collectively, we came up with something that’s really good,” said Assemblyman Brian Maienschein, a San Diego Republican.

But not all Republicans were won over.

“What about the consumers,” asked state Sen. Jeff Stone (R-Murrieta), questioning the assertion that there would be no costs passed along by the healthcare plans. “When we raise taxes, someone’s got to pay the bill.”

What is the tax plan?

Health insurers would be taxed according to a elaborately tiered system, based on the number of Medi-Cal and non-Medi-Cal patients each plan serves. Kaiser Permanente, a large nonprofit, has its own designated tax rate. Certain small local plans in Sacramento and San Diego counties are exempted entirely.

The new levy is offset by tax relief; corporation and gross premium taxes would be rolled back.

In all, the package would generate around $1.35 billion for the state. And with the eliminated taxes, the health plans as a whole would actually come out ahead by about $100 million.

Sound complicated? It is. Brown joked with reporters during his budget rollout that "very few people understand [the so-called MCO tax]. ... I couldn’t explain it to you if I wanted to."

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Why is this necessary?

California currently imposes a tax only on the managed care organizations that serve Medi-Cal clients; the plans are then fully reimbursed with federal dollars. But the Obama administration has said such a tax structure doesn't comply with federal rules. To draw down federal funds, the administration said, the state must tax all healthcare plans.

The state's existing tax expires at the end of June. The Brown administration negotiated with health plans for over a year to hammer out a replacement tax package in order to avoid losing more than $1 billion for Medi-Cal.

How do Republicans feel about the proposal?

It depends who you ask.

Republicans are typically loath to approve new taxes, and there are certainly GOP legislators who have rejected this proposal as a tax hike.

But others have been friendlier to the package, in part because of the traditional GOP allies on board. Most health insurers, including major players such as Blue Shield, Anthem and a trade group, the California Assn. of Health Plans, are in support and have said the new proposal will not affect consumers. The California Chamber of Commerce also backs the plan, and the Howard Jarvis Taxpayers Assn., an influential anti-tax group, is neutral.

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Because the tax proposal required a two-thirds vote in the Legislature, some Republican support was crucial — the legislation needed at least one GOP vote in the Senate and at least three Republican "ayes" in the Assembly.

Ultimately, two Republicans in the Senate and 11 in the Assembly voted yes on the tax measure. All Democrats present on Monday voted ‘aye.’

With that leverage, some Republicans pushed for policy priorities. The Assembly GOP laid out its wish list of spending it would like to see with the money made possible by a new tax.

Some conservative activists aren't thrilled by the Assembly GOP's bargaining. Grover Norquist, an anti-tax crusader, said such negotiating is bad policy and terrible politics.

Jon Fleischman, publisher of the influential conservative news site Flash Report, has been excoriating Republican members who are signaling support.

What else was voted on?

There were two other measures approved Monday. One would put about $300 million into services for the developmentally disabled, including higher wages for staff at regional centers and increased money to support independent-living programs. Legislators in both parties have been agitating for more funding for such services for several years.

That bill also includes one of the items on the Assembly GOP priority list: about $120 million for certain nursing facilities to offset cuts that were passed five years ago.

The second bill deals with paying down the state's debts. It would allocate $240 million toward paying off the state's liabilities for retiree healthcare for public workers. It also would pay back a $173-million transportation loan. Debt repayment has been a priority for the Republicans and for the governor.

What comes next?

The tax structure still needs to be approved by the Obama administration. State officials say they're confident that the plan will pass muster.


5 p.m.: This story was updated to reflect passage of the tax package.

This article was originally published at 8:08 a.m.

Follow @melmason for more on California government and politics.


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