Legislation that first appeared little more than one week ago, which is moving so fast it could be law this week, could give California’s health insurance companies one of the largest tax giveaways of the century.
Billed as a solution to what’s long vexed the Legislature and Governor Jerry Brown, how 
to get a tax on health insurance companies to get matching federal dollars for Medi-cal, SB X2 15 is far more.
to get a tax on health insurance companies to get matching federal dollars for Medi-cal, SB X2 15 is far more.
The proposal, dead in the water all last year, was suddenly revived in December as a key legal ruling foreshadowed a $10 billion back tax bill for the state's four largest health insurers. With the legal ruling hanging over the health plans' heads like Damocles's sword, they no doubt turned to Brown and Co for future tax relief in wake of the court decision.
The notion of extending the Medi-cal tax is correct, but it doesn’t have to involve a multi-billion dollar giveaway at the expense of taxpayers. Of course, how else to do you manufacture a law and a 2/3s vote in Sacramento in such record time?
Here’s how the Valentine to the health insurers could work:
SB X2 15 claims to trade existing taxes for a new tax to fund the Medi-Cal program and be more or less “revenue neutral.” There's supposed to be only a $90 million benefit to insurance companies for agreeing to the tax, but the loss to the general fund is actually more than $1 billion in future taxes saved by insurance companies and lost to taxpayers.
The reason is that SB X2 15 zeroes out the gross premiums tax, which is paid by insurance companies, and could limit who pays that tax in the future.
The new court ruling makes it very likely that number of insurance companies that pay the gross premiums tax will soon grow and add $1 billion plus in future revenues to the general fund each year. In Myers v. State Board of Equalization et al. v. California Physicians’ Service et al (Sept. 25, 2015, B255445), the Court of Appeal, backed by the Supreme Court in December, ruled that if the majority of the company’s business is taking on risk, as opposed to passing on risk to doctors and hospitals, then it should pay taxes like an insurance company.
That means the Big Four companies that currently don’t pay Gross Premium Tax – Kaiser, Blue Shield, Blue Cross and Health Net – will have to ante up. The added booty for the general fund is about $10 billion in back taxes and over $1 billion plus per year in future taxes. But SB X2 15 zeroes out the gross premiums tax that health insurance companies pay the state for the next three years. So the the state could lose that extra $1 billion plus per year.
Brown Administration Health Care Chief Jennifer Kent admitted in a committee hearing that they needed to give health insurance companies reason to vote for the bill and that the fiscal analysis of SB X2 15 doesn’t contemplate losses of the gross premiums tax insurance companies would pay under the Meyers decision. Who said Gov Brown was thrifty?
Since Kent said that the Myers decision was not part of the bill's calculation, how about an amendment to say so? Future revenue can be protected without blowing up the Medi-Cal tax if cooler heads prevail. Unless, of course, Myers was baked into the deal from the beginning.
That would be pretty costly sausage. Those who depend on the general fund in the future for planes to put out fires, school funding, and other services take at $1 billion hit in future funds to get health insurance companies on board with a tax that they should be paying anyway and have plenty of money in the bank to cover. Long term, cutting out the future gross premiums tax that the Big Four should pay, but have evaded, actually undermines the Medi-Cal program.
In that case, Happy Valentine’s Day Big Four Health Insurers. They already have a guaranteed market for health insurance. They have no rate regulation, unlike their affiliates in 35 states. Why not throw a $1 billion plus per year tax break in for good measure?
