Trump Admin Blocks California Health Care Tax, a Move That Could Cost the State Nearly $2B a Year

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California Gov. Gavin Newsom speaks during a a news conference in Oakland about the state's efforts to address homelessness on Jan. 16, 2020. (Credit: Justin Sullivan / Getty Images)

California Gov. Gavin Newsom speaks during a a news conference in Oakland about the state’s efforts to address homelessness on Jan. 16, 2020. (Credit: Justin Sullivan / Getty Images)

The Trump administration says it will not allow California to collect a key health care tax on managed care organizations, a decision that could cost the state nearly $2 billion a year for low-income benefits.

The news does not immediately affect California’s budget because the state did not plan to receive that money this year or the budget year that begins July 1. But it could cost California $1.2 billion in the fiscal year that begins July 1, 2021, California Department of Finance spokesman H.D. Palmer said. That number increases to $1.9 billion after that.

“The Administration will continue its ongoing discussions with federal Medicaid officials on this issue,” Palmer said. “Consistent with the federal government’s prior approvals of similar financing waivers, we believe and expect that we can reach an agreement that allows this type of financing to continue.”

The decision will likely further inflame tensions between the Trump administration and Gov. Gavin Newsom, who are fighting over money for a high-speed rail project and California’s authority to set its own vehicle emission standards.

The tax applies to managed care organizations that administer California’s Medicaid plans, the joint state and federal program that provides health benefits for the poor and people with disabilities.

California uses the money it gets from the taxes to pay its share of Medicaid costs, which then triggers payments from the federal government. It was expected to save the state about $1.2 billion in the 2021-22 budget year and $1.9 billion in the 2022-23 budget year.

Losing the money likely won’t cripple California’s Medicaid program, the largest in the country with a budget of more than $100 billion, said John Baackes, CEO of LA Care Health Plan, the largest publicly-operated health plan in the country with nearly 2.2 million members.

“For me, the bigger question is how (are) the Newsom administration and the Trump administration going to find a way to work together that doesn’t cause harm to the people here who depend on these programs?” Baackes said. “The Trump administration doesn’t seem to be as willing to talk.”

While a small part of the overall Medicaid budget, the money is an important for number of benefits that would be eliminated without it, said Anthony Wright, executive director of Health Access, a consumer health care advocacy group. Plus, he said the Trump administration’s decision was surprising given that it has approved similar proposals from Ohio and Michigan.

“There should be no reason why California should not be able to get a revenue stream for our Medicaid program that other states are getting,” he said.

The Centers for Medicare and Medicaid Services says it won’t allow the tax because it only applies to managed care organizations that receive Medicaid payments. Organizations that don’t receive Medicaid payments would not be taxed. That is against federal rules, according to a letter from Calder Lynch, acting deputy administrator and director of the federal Center for Medicare and Medicaid Services.

Gov. Gavin Newsom had planned to use the money from the tax to extend the extension of 21 programs, including an 18-month extension of a sales tax exemption on diapers and tampons. Those tax exemptions are scheduled to expire in in 2022.

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