Michigan HICA Tax Repeal? Signs Point To Yes!
On June 11, 2018, Governor Snyder signed a series of bills that repeal the Michigan Health Insurance Claims Assessment (HICA) tax. While all employer-sponsored group health plans benefit from HICA tax repeal, the true winners will be self-funded group health plans and their third-party administrators (TPAs).
The HICA tax provides funding for a portion of Michigan’s Medicaid budget. So, the HICA tax repeal is conditioned on the Centers for Medicare & Medicaid Services (CMS) approving its proposed replacement tax for a period of at least five years.
As explained below, the legislation includes a proposed replacement tax, the Investment Provider Assessment (IPA). While CMS has not approved the Michigan IPA, it has previously approved a similar arrangement in California. Since the HICA tax repeal is not yet reality, we asked our trusty Magic 8-Ball whether it would be repealed. The answer: “Signs Point to Yes!”
Understanding the joint federal and state effort to fund states’ Medicaid programs is challenging. The methods used in Michigan have changed numerous times in the past 20 years: the Quality Assurance Assessment Program (2002-2009); a use tax (2009-2011); and the HICA tax (2012-?)
With certain exceptions, the HICA tax imposes a 1% tax on all paid health claims in the state of Michigan, including those claims paid by fully insured and self-funded group health plans. (The 1% was lowered to .75% from July 1, 2014 until December 31, 2016.) Account-based group health plans (e.g., HRAs, health FSAs, HSAs) were excluded from the HICA tax.
Technically, the HICA tax was imposed on the carriers of fully insured group health plans and the TPAs of self-funded group health plans. But those costs were certainly shifted to employer-plan sponsors of group health plans.
There were numerous problems with the HICA tax. Namely, it generated far less revenue than predicted. And, the business community generally disliked the HICA tax because it increased the cost of providing health coverage to employees. Finally, the HICA tax was scheduled to “sunset” on July 1, 2020, without further legislative action.
Insurance Provider Assessment
Despite the HICA tax’s shortcomings, it generated $318 million of revenue for Michigan in fiscal year 2016-17. Without a meaningful replacement, the repeal of the HICA tax would create a significant adverse impact on Michigan’s General Fund/General Purpose spending.
As explained below, the IPA — if approved by CMS — is a three-tier tax on insurance providers. (As a precondition of federal Medicaid matching, federal law requires any healthcare-related tax to be uniformly imposed throughout the state. Because the IPA is not uniformly imposed, a CMS waiver is required).
- First-tier: Medicaid managed care organizations would be subject to a variable- and fixed-rate tax. The variable-rate would be established each year by the Michigan Department of Health and Human Services (MDHHS) and apply to a specified number of “member months,” which is also annually established by the MDHHS. Any member months in excess of the number specified by MDHHS would be subject to a fixed-rate of $1.20 per member month.
- Second-tier: Health insurers (which includes any insurer authorized to deliver a health insurance policy in Michigan and HMOs) would be subject to a fixed-rate of $2.40 per member month for all member months not supported by Medicaid funds.
- Third-tier: Prepaid Inpatient Health Plans (PHIPs) would be subject to a fixed-rate of $1.20 per member month for all member months not supported by Medicaid funds.
“Member months” generally mean the total number of individuals for whom the insurance provider has recognized revenue for one month. Member months exclude individuals enrolled in: short-term medical; 1-time limited duration; noncomprehensive medical; specified disease; limited benefit; accident only; accidental death and dismemberment; disability income; long-term care; Medicare supplement; stand-alone dental; dental; Medicare; Medicare Advantage; Medicare Part D; vision; prescription; other individual write-in coverage; federal employee health benefit; TRICARE; other group write-in coverage; credit; stop-loss; excess-loss; administrative services only, or administrative services contracts.
In other words, self-funded group health plans and their TPAs are not subject to the IPA.
Assuming a favorable determination by CMS, the HICA tax will be repealed and the IPA will be effective on the later of: (1) the first day of the calendar quarter during which MDHHS is notified that its waiver request is approved by CMS; and (2) October 1, 2018.
Miller Johnson’s Musings
The clear winners of the replacement of the HICA tax with the IPA are self-funded group health plans and their TPAs, because neither are subject to the IPA.
Since health insurers are subject to the tax, including for member months under group health plans, it is likely the cost of the IPA will continue to be shifted to employer-plan sponsors of group health plans. (We again asked our Magic 8-Ball if health insurers would shift the cost of the IPA, the answer: “It is Decidedly So!”)
At this point, there are no “next steps” for employer-plan sponsors of group health plans other than wait for CMS’s decision regarding the IPA. You could try to pass the time by asking your own Magic 8-Ball whether the HICA tax will be repealed? Or, you could contact the author (or any member of the Employee Benefits Practice Group) for predictions or with questions.