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Responsibly Replacing the Medicaid MCO Sales Tax

The Governor's Budget Plan Maintains Balance, Provides Transitional Support for Local Governments and Transit Authorities

Since 2009, Ohio - like a number of other states - has imposed a sales tax on Medicaid Managed Care Organizations (MCOs) based on the Medicaid payments the MCOs receive from the state. However, a federal rule change impacting this sales tax program has created a unique challenge in the upcoming biennial budget. In 2014, the federal Centers for Medicare and Medicaid Services (CMS) declared that, as of July 2017, Ohio's Medicaid MCO sale tax would no longer be a permissible taxing method used to draw down Medicaid matching funds from the federal government.

If Ohio fails to adopt a federally approved replacement plan, the state will face a $597 million state revenue shortfall in its Fiscal Year 2018. Additionally, because the federal rule change also impacts local “piggyback” sales taxes, county governments and local transit authorities will collectively face a shortfall of more than $200 million.

Since CMS announced this policy change, the Kasich Administration has been working to find a responsible solution that takes into consideration state budget realities, local government concerns and other stakeholder input. The Executive Budget proposal includes a replacement tax program based on a federally approved Medicaid waiver that maintains state fiscal stability and provides temporary, need-based support to counties that stand to lose funding due to the federal change.

MEDICAID MCO SALES TAX REPLACEMENT PLAN

As the governor's new FY 2018-2019 budget was being developed, the Kasich Administration felt an urgent need to seek federal approval of a Medicaid MCO sales tax replacement plan prior to the budget's introduction. In December 2016, CMS approved a waiver request by Ohio Medicaid to replace the current tax program with an alternative that addresses federal concerns and eliminates projected state budget shortfalls.

  • Under new waiver authority granted by the federal government, and contingent upon state legislative approval of the Executive Budget proposal, Ohio's Medicaid MCO sales tax replacement plan will apply a broad-based tax to all Medicaid MCOs and non-Medicaid major medical MCOs to generate $858 million annually.
  • The tax rate to be paid by Medicaid MCOs will range from $26 to $56 per member per month, while non-Medicaid major medical MCOs will pay a significantly lower rate of $1 to $2 per member per month.
  • Medicaid MCOs will recover the entire cost of the sales tax replacement - $854 million annually - because that cost is an allowed expense reimbursed by Ohio Medicaid and CMS. However, non-Medicaid MCOs are not eligible for reimbursement. With this in mind, the CMS-approved plan aims to limit the financial impact on these non-Medicaid entities by constraining the total combined tax to a significantly smaller amount of $4 million annually.
  • The federally approved replacement plan will produce an estimated $615 million in state revenues, fully replacing the $597 million Ohio would have received under the existing Medicaid MCO sales tax system.

TRANSITIONAL SUPPORT FOR LOCAL GOVERNMENTS AND TRANSIT AUTHORITIES

In June 2016, the state Office of Budget and Management (OBM) notified county leaders about the potential loss of Medicaid MCO sales tax revenue based on federal rule changes. OBM also communicated that the Kasich Administration would consider options to mitigate the local impact of this revenue loss.

While the Medicaid MCO sales tax replacement plan does not generate revenue for local taxing authorities, the Executive Budget does provide two types of transition assistance to counties and transit authorities: (1) a revenue replacement calculation for the last quarter of calendar year 2017 and (2) formula loss assistance post-calendar year 2017.

  • $49 Million - Revenue Replacement Calculation will be provided to all 88 counties and eight transit authorities to completely replace revenue lost from October 1, 2017 to December 31, 2017 as a result of repealing the Medicaid MCO sales tax (the first sales tax distribution where any local loss would be felt is October). This form of aid amounts to $49 million, with the payments to be made late in calendar year 2017.
  • $158 Million - Formula Loss Assistance will be provided in one lump sum based on a multi-year formula that considers each taxing authority's reliance on the Medicaid MCO sales tax, actual Medicaid MCO sales tax distributions, per capita sales tax base, and total permissive sales tax distributions. This form of aid amounts to $158 million, with payments made in calendar year 2017. All eight transit authorities and 80 counties will receive revenue loss assistance. The eight counties that do not receive assistance have Medicaid MCO sales tax revenues of less than four percent of total sales tax revenues.

BOTTOM LINE: In the face of a tough budget challenge created by a federal rule change, Gov. Kasich's budget proposal includes a federally approved Medicaid MCO sales tax replacement plan that maintains fiscal stability, limits negative impacts on Ohio's non-Medicaid MCOs and provides temporary assistance to counties and transit authorities as they work to reduce their reliance on this seven-year-old state sales tax program.